-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V7md3R65vrUhuzUG/W2RYwAMWtlglkwOXzaw8hMnGYq8u6LBNSSZgKxoO0WnK4ls jj6ZjLzDRg2VxfemVioTiQ== 0000950131-97-001798.txt : 19970317 0000950131-97-001798.hdr.sgml : 19970317 ACCESSION NUMBER: 0000950131-97-001798 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREEN TREE FINANCIAL CORP CENTRAL INDEX KEY: 0000890175 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 411263905 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08916 FILM NUMBER: 97556620 BUSINESS ADDRESS: STREET 1: 500 LANDMARK TOWERS STREET 2: 345 ST PETER ST CITY: SAINT PAUL STATE: MN ZIP: 55102-1637 BUSINESS PHONE: 6122933400 MAIL ADDRESS: STREET 1: 500 LANDMARK TOWERS STREET 2: 345 ST PETER ST CITY: SAINT PAUL STATE: MN ZIP: 55102-1637 FORMER COMPANY: FORMER CONFORMED NAME: GREEN TREE ACCEPTANCE INC DATE OF NAME CHANGE: 19600201 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF g THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-08916 GREEN TREE FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 41-1807858 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1100 Landmark Towers 345 St. Peter Street, Saint Paul, Minnesota 55102-1639 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 293-3400 ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (Name of Each Exchange ---------------------- (Title of Each Class) on Which Registered) --------------------- ---------------------- Common Stock, $.01 par value New York Stock Exchange, Pacific Stock Exchange 10 1/4% Senior Subordinated Notes due June 1, 2002 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) As of February 28, 1997, the aggregate market value of voting stock held by nonaffiliates of registrant was approximately $4,973,509,000. As of February 28, 1997, the shares outstanding of the issuer's class of Common Stock were as follows: Common Stock 139,068,484 ------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Part of 10-K Document Where Incorporated -------- ------------------ Proxy Statement for the 1997 Annual III Meeting of Stockholders PART I ------ Item 1. Business. General Green Tree Financial Corporation ("Green Tree" or the "Company")is a diversified financial services company that provides financing for manufactured homes, home equity, home improvements, consumer products and equipment and provides consumer and commercial revolving credit. The Company's insurance agencies market physical damage and term mortgage life insurance and other credit protection relating to the customers' contracts it services. Green Tree is the largest servicer of manufactured housing contracts in the United States. Through its principal offices in Saint Paul, Minnesota and service centers throughout the United States, Green Tree serves all 50 states. Green Tree pools and securitizes substantially all of the contracts it originates, retaining the servicing on the contracts. Such pools are structured into asset-backed securities which are sold in the public securities markets. In servicing the contracts, the Company collects payments from the borrower and remits principal and interest payments to the holder of the contract or investor certificate backed by the contracts. The Company was originally incorporated under the laws of the State of Minnesota in 1975. In 1995 the Company reincorporated under the laws of the State of Delaware. Green Tree Financial Corporation's principal executive offices are located at 1100 Landmark Towers, 345 St. Peter Street, Saint Paul, Minnesota 55102-1639, and its telephone number is (612) 293-3400. Unless the context otherwise requires, "Green Tree" or the "Company" means Green Tree Financial Corporation and its subsidiaries. Purchase and Origination of Fixed Term Contracts The Company originates a variety of financing transactions on either a "direct" or "indirect" basis. Under an "indirect" financing transaction, a dealer sells a product to a customer and enters into a sales contract with the customer evidencing a monetary obligation and providing security for that obligation. The Company purchases such sales contracts from dealers and contractors in the ordinary course of its business. Under a "direct" origination, the Company and borrower are direct parties to the loan documentation which evidences the borrower's obligation to the Company. References herein to the terms "contracts," "sales contracts" or "loans" may be used to refer to either "direct" or "indirect" financing transactions as the context requires. All direct or indirect originations are written on forms provided or approved by the Company and are originated on an individually approved basis in accordance with Company underwriting guidelines. -1- Manufactured Housing "Manufactured housing" (MH) or a "manufactured home" is a structure, transportable in one or more sections, which is designed to be a dwelling with or without a permanent foundation. Since most manufactured homes are never moved once the home has reached the homesite, the wheels and axles are removable and have not been designed for continuous use. Manufactured housing does not include either modular housing (which typically involves more sections, greater assembly and a separate means of transporting the sections) or recreational vehicles ("RV's") (which are either self-propelled vehicles or units towed by passenger vehicles). The majority of the Company's sales contracts for manufactured home purchases are financed on a conventional basis, with a small number of units insured by the FHA or partially guaranteed by the VA. With respect to manufactured housing, the relative volume of conventional, FHA and VA contracts originated by the Company depends on customer and dealer preferences as well as prevailing market conditions. The Company has developed more cost effective conventional manufactured housing lending programs and as a result, FHA and VA contracts represented less than 1% of the Company's manufactured housing originations during 1996. FHA and VA contracts constituted 5% of the Company's servicing portfolio at December 31, 1996 with approximately 95% of these contracts being FHA. Manufactured housing contracts are generally subject to minimum down payments of at least 5% of the amount financed. The Company offers manufactured housing contract terms of up to 30 years. Through its regional service centers, the Company arranges to purchase MH contracts from MH dealers located throughout the United States. The Company's regional service center personnel contact dealers located in their region and explain the Company's available financing plans, terms, prevailing rates, and credit and financing policies. If the dealer wishes to utilize the Company's available customer financing, the dealer must make an application for dealer approval. Upon satisfactory results of the Company's investigation of the dealer's creditworthiness and general business reputation, the Company and the dealer execute a dealer agreement. The Company also originates manufactured housing installment loan agreements directly with customers. For the year ended December 31, 1996, the Company's manufactured housing contract originations consisted of 83% purchased from dealers, and 17% directly originated by the Company. The dealer or the customer submits the customer's credit application and, with respect to new manufactured homes, the purchase order to a central or regional service center where Company personnel make an analysis of the creditworthiness of such customer. If the application meets the Company's guidelines and credit is approved, the Company generally purchases the contract -2- after the manufactured home is delivered, set up and the customer has moved in. For manufactured housing contracts, the Company uses a proprietary automated credit scoring system. The scoring system is statistically based, quantifying information using variables obtained from customers' credit applications and credit reports. As of December 31, 1996, this credit scoring system has been used in making credit determinations on over two million applications. In 1996, new manufactured housing shipments rose to approximately 363,000 units, a 7% increase over 1995. The Company continues to benefit from this increase and believes that it is maintaining its market share of contracts for financing new manufactured homes. Competition to finance manufactured home purchases continues to be strong, and there can be no assurance that such competition will not intensify in the future. Significant decreases in consumer demand for manufactured housing, or significant increases in competition, could have an adverse effect on the Company's financial position and results of operations. Home Equity The Company began originating and purchasing home equity loans in January 1996. Through a system of regional offices, the Company markets its home equity lending directly to consumers using a variety of techniques. The Company also reviews and re-underwrites loan applications forwarded by correspondent lenders. During 1996, approximately 25% of home equity loan originations resulted from the Company's personnel marketing directly to the consumer. The remaining loan originations were primarily transactions between the Company and correspondents, with a much smaller percentage of transactions occurring between the Company and brokers. Typically, home equity loans are secured by first and second liens on site-built homes. Homes used for collateral in securing home equity loans may be either residential or investor owned one- to four-family homes having a minimum appraised value of $25,000. Home Improvement The types of home improvements financed by the Company include exterior renovations, including windows, siding and roofing; pools and spas; kitchen and bath remodeling; and room additions and garages. The Company may also, under certain limited conditions, extend additional credit beyond the purchase price of the home improvement for the purpose of debt consolidation. Through its centralized loan processing operations in Saint Paul, Minnesota, the Company arranges to purchase certain contracts from home improvement contractors located throughout the United States. -3- The Company's sales personnel contact home improvement contractors and explain the Company's available financing plans, terms, prevailing rates and credit and financing policies. If the contractor wishes to utilize the Company's available customer financing, the contractor must make an application for contractor approval. The Company has a contractor approval process pursuant to which the financial condition, business experience and qualifications of the contractor are reviewed prior to his or her approval to sell contracts to the Company. The Company occasionally will originate directly a home improvement promissory note involving a home improvement transaction. The Company finances both conventional home improvement (HI) contracts and HI contracts insured through the FHA Title I program. Such contracts are generally secured by first, second or, to a lesser extent, third liens on the improved real estate. The Company has also implemented an unsecured conventional HI lending program for certain customers which generally allows for loan amounts ranging from $2,500 to $15,000. Unsecured loans account for less than 10% of the home improvement servicing portfolio. The contractor submits the customer's credit application and construction contract to the Company's office where an analysis of the creditworthiness of the customer is made using a proprietary credit scoring system that was implemented by the Company in June 1993. If it is determined that the application meets the Company's underwriting guidelines and applicable FHA regulations (for FHA-insured contracts) and the credit is approved, the Company purchases the contract from the contractor generally when the customer verifies satisfactory completion of the work (usually funded in stages with multiple checks). Consumer Green Tree provides consumer financing for the purchase of marine products (including boats, boat trailers and outboard motors); motorcycles; recreational vehicles; sport vehicles (including snowmobiles, personal watercraft and all- terrain vehicles); pianos and organs; and horse and utility trailers. The Company arranges to purchase certain contracts originated by dealers throughout the United States. The Company's personnel contact dealers and explain Green Tree's available financing plans, terms, prevailing rates and credit and financing policies. If the dealer wishes to utilize the Company's available customer financing, the dealer must make an application for approval. The dealer submits the customer's credit application and purchase order to the Company's central service center where an analysis of the creditworthiness of the proposed buyer is made. If the application meets the Company's guidelines and credit is approved, the Company purchases the contract when the customer completes the purchase transaction with the dealer. -4- Equipment Equipment financing is provided by the Company for the purchase of trucks, trailers and aircraft. The Company also provides financing through the leasing of commercial equipment such as copiers, fax machines, telecommunications equipment, computers and other office equipment. Company personnel contact dealers and vendors and provide explanation of the available financing plans offered, including terms, prevailing interest rates, credit, residual purchase options and financing policies. The dealer or vendor submits an application for approval if he or she wishes to utilize Green Tree's available customer financing. Upon receipt of a customer's credit application and purchase order from the dealer or vendor, the Company analyzes the creditworthiness of the applicant. If the application meets the Company's guidelines and credit is approved, the Company purchases the sales contracts or lease equipment at the time the customer accepts delivery of the product. -5- The volume of fixed term contracts originated by the Company during the past five years and certain other information for each of those years is indicated below:
Year ended December 31 --------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992(a) ----------------- --------------- -------------- ------------- ------------- (dollars in thousands) Volume of contracts: Manufactured Housing $4,882,018 $4,159,836 $3,201,491 $2,449,121 $1,208,866 Home Improvement/ Home Equity 1,490,720 626,986 465,523 169,443 75,287 Consumer/ Other 1,192,579 471,153 96,172 47,442 34,911 ---------- ---------- ---------- ---------- ---------- Total $7,565,317 $5,257,975 $3,763,186 $2,666,006 $1,319,064 ========== ========== ========== ========== ========== Number of contracts: Manufactured Housing 143,145 133,398 117,742 96,934 53,484 Home Improvement/ Home Equity 65,752 49,135 39,375 16,926 8,384 Consumer/ Other 77,834 38,828 11,333 6,161 4,235 ------- ------- ------- ------- ------ Total 286,731 221,361 168,450 120,021 66,103 ======= ======= ======= ======= ====== Weighted average interest rates: Manufactured Housing 10.2% 10.7% 11.0% 10.1% 11.5% Home Improvement/ Home Equity 12.1 12.5 12.1 12.6 13.9 Consumer/ Other 11.2 11.8 11.7 13.2 14.7 ---- ---- ---- ---- ---- Weighted average interest rate 10.7% 11.0% 11.2% 10.3% 11.7% ==== ==== ==== ==== ==== - ------------------
(a) Does not include $552,936,000 of conventional contracts purchased from the Resolution Trust Corporation ("RTC"). The Company believes that, in addition to an individual analysis of each contract, it is important to achieve a geographic dispersion of contracts in order to reduce the impact of regional economic conditions on the overall performance of the Company's portfolio. Accordingly, the Company seeks to maintain a portfolio of contracts dispersed throughout the United States. At December 31, 1996, no state accounted for more than 10% of all contracts serviced by the Company. -6- In 1996, no single dealer accounted for more than one percent of the total number of contracts originated by the Company. Likewise, no single contractor, dealer or vendor accounted for more than two percent of the total number of contracts or leases originated by the Company. Commercial and Consumer Revolving Credit The Company provides commercial revolving credit to dealers, manufacturers and distributors of various consumer and commercial products and provides consumer revolving credit through selected merchants and dealers. Pursuant to the terms of such revolving credit agreements, the Company funds product inventory or customer purchases. Typically the inventory products secure the commercial revolving credit transactions. Reference herein to the term "revolving credit" may be used in reference to commercial finance, floorplan receivables, asset-based receivables or retail credit. Commercial Through its three regional lending centers, the Company extends credit generally under revolving credit agreements with dealers, manufacturers and distributors of various consumer and commercial products. "Floorplan Receivables" represent the financing of product inventory for retail dealers of a variety of consumer products. The products securing the Floorplan Receivables currently include manufactured housing, recreational vehicles and marine products. "Asset-Based Receivables" generally represent the financing of production and inventory by manufacturers, such revolving credit arrangements being secured by finished goods inventory, accounts receivable rising from the sale of such inventory, certain work-in-process, raw materials and component parts, as well as other assets of the borrower, and may include real estate. The gross outstanding commercial finance receivables are $1.1 billion at December 31, 1996. The Company will provide financing for products for a particular dealer, manufacturer or distributor ("Dealer"), in most instances, only if the Company has also entered into a floorplanning agreement with the manufacturer, distributor or other vendor of such product. A Dealer requesting the establishment of a credit line with Green Tree is required to submit an application and financial information. Advances made for the purchase of inventory are most commonly arranged in the following manner: the Dealer will contact the manufacturer and place a purchase order for a shipment of inventory. If the manufacturer has been advised that Green Tree is the Dealer's inventory financing source, the manufacturer will contact Green Tree to obtain an approval number with respect to -7- such purchase order. Upon such request, the Company will determine whether (i) the manufacturer is in compliance with its floorplan agreement, (ii) the Dealer is in compliance with its program with Green Tree and (iii) such purchase order is within the Dealer's credit limit. If all of such requirements are met, the Company will issue an approval number to the manufacturer. The manufacturer will then ship the inventory and directly submit its invoice for such purchase order to Green Tree for payment. Interest or finance charges normally begin to accrue on the Dealer's accounts as of the invoice date. The proceeds of the loan being made by the Company to the Dealer are paid directly to the manufacturer in satisfaction of the invoice price and are often funded a number of days subsequent to the invoice date depending upon the Company's arrangements with the manufacturer. Inventory inspections are performed to physically verify the collateral used to secure a Dealer's loan, check the condition of the inventory, account for any missing inventory and collect any funds due. Approximately two- thirds of Green Tree's MH dealers are participants in this program. Asset-Based Receivables are credit facilities provided to certain manufacturers and distributors which typically involve a revolving line of credit, for a contractually committed period of time, pursuant to which the borrower may draw the lesser of the maximum amount of such line of credit or a specifically negotiated loan availability amount, subject to the availability of adequate collateral. The loan availability amount is determined by multiplying an agreed upon advance rate against the value of certain types of assets. In these facilities, Green Tree will most typically lend against finished inventory and eligible accounts receivable arising from the sale of such inventory which are free and clear of other liens and otherwise in compliance with specified standards. Certain Asset-Based Receivables may also be secured by commercial real estate. Consumer The Company began offering a private label retail credit program in 1996 and has entered into program agreements with selected retailers to provide competitive credit card services to the customers of such retailers. Green Tree has chartered a limited purpose credit card bank to conduct its credit card business. The bank, Green Tree Retail Services Bank, is a state chartered bank located in Rapid City, South Dakota. The Company has a retailer approval process pursuant to which the financial condition, business experience and customer service reputation are reviewed. The Company also underwrites the credit of individual customers for approval utilizing a credit scoring system. On December 31, 1996, the Company had $40.8 million in outstanding revolving credit receivables. -8- Pooling, Disposition and Related Sales Structures of Contracts, Net Interest Margin Certificates and Floorplan Receivables The Company regularly pools contracts for sale to investors. It is the Company's policy to sell substantially all of the contracts it originates or purchases through asset-backed securities. During 1995 and 1994, the Company securitized a significant portion of its excess servicing rights receivable in the form of securitized Net Interest Margin Certificates ("NIM Certificates"), and in 1996 and 1995 securitized a significant portion of its outstanding floorplan and asset-based receivables. Manufactured housing, home improvement, home equity and consumer and equipment finance contracts are pooled and sold by the Company through securitized asset sales which have been either single class or senior/subordinated pass-through structures. Under certain securitized sales structures corporate guarantees, bank letters of credit, surety bonds, cash deposits or other equivalent collateral have been provided by the Company as credit enhancements. The Company analyzes the cash flows unique to each transaction, as well as the marketability and earnings potential of such transactions when choosing the appropriate structure for each securitized loan sale. The structure of each securitized sale depends, to a great extent, on conditions of the fixed income markets at the time of sale as well as cost considerations and availability and effectiveness of the various enhancement methods. Customer principal and interest payments are deposited in separate bank accounts as received by the Company and are held for monthly distribution to the certificateholders. In previous years Green Tree sold a substantial portion of its excess servicing rights receivable, representing net cash flows retained from the securitization of its manufactured housing contracts, in the form of securitized NIM Certificates through public offerings. A subordinated interest in those certificates was retained by the Company. As a result of these transactions, certain net cash flows that formerly were retained by Green Tree are now passed through to investors with the exception of a servicing fee which Green Tree retains out of available monthly net cash flows. Payments on the subordinated interests retained do not commence until the senior certificateholders have been paid all principal and interest due them under the terms of the transaction. Interest will continue to accrue to the balance of such subordinated certificates until payments commence. In initially valuing its excess servicing rights receivable, the Company establishes an allowance for expected losses and calculates that allowance on the basis of historical experience and management's best estimate of future credit losses likely to be incurred. If there are defaults on contracts not sold as part of the NIM Certificate sales, any net losses on the liquidation of underlying collateral are charged against the reserves that have -9- been established. Losses in excess of those projected in the valuation of the NIM Certificates have the effect of reducing the value of the subordinate interest retained by Green Tree. The dollar amount of potential contractual recourse to the Company exceeds both the amount of projected losses factored into the subordinated certificate valuation and the amount established by the Company as an "allowance for losses on contracts sold." During 1995 the Company formed a Master Trust for purposes of selling its commercial finance receivables. In 1996 and 1995 the Company sold certificates out of this trust totaling approximately $500 million and $428 million, respectively. Estimated losses relating to the Company's commercial finance receivables are recorded at the time the loans are made. Commercial finance receivables as shown on the balance sheet are net of the related allowance for losses and net of amounts securitized. Information on the Company's securitized asset sales is as follows:
Year ended December 31 --------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- --------- (dollars in millions) Contracts sold: Manufactured Housing $5,033 $4,020 $3,226 $2,303 $1,716(a) Home Equity/ Home Improvement 1,324 579 544 43 72 Consumer/Other 1,556 -- -- -- 84 ------ ------ ------ ------ ------ 7,913 4,599 3,770 2,346 1,872 NIM Certificates -- 308 600 -- -- Floorplan/Asset-Based Receivables 500 428 -- -- -- ------ ------ ------ ------ ------ Total $8,413 $5,335 $4,370 $2,346 $1,872 ====== ====== ====== ====== ====== (a) Includes $533 million of contracts purchased from RTC. Year ended December 31 --------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Weighted average yield to investors on contracts sold: Manufactured Housing 7.4% 7.3% 8.1% 6.5% 7.7% Home Improvement/ Home Equity 7.2 7.0 8.0 6.4 7.3 Consumer/Other 6.0 -- -- -- 6.4 ------ ------ ------ ------ ------ Weighted average yield 7.1% 7.2% 8.1% 6.5% 7.6% ====== ====== ====== ====== ======
-10- Servicing The Company services all of the contracts and consumer and commercial revolving credit receivables that it originates or purchases from other originators, collecting loan payments, taxes and insurance payments, where applicable, and other payments from borrowers and remitting principal and interest payments to the holders of the asset-backed securities. The following table reflects the composition of the Company's servicing portfolio at December 31 for the years indicated on contracts it originated.
December 31 ------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (dollars in millions) Fixed term contracts $ 18,965 $ 13,314 $ 9,653 $ 7,194 $ 5,623 Revolving credit 1,108 574 168 -- -- -------- -------- -------- -------- -------- Total $ 20,073 $ 13,888 $ 9,821 $ 7,194 $ 5,623 ======== ======== ======== ======== ======== Number of contracts serviced 826,863 656,845 511,519 406,393 340,315
Delinquency and Loss Experience A fixed term contract is considered delinquent by the Company if any payment of $25 or more is past due 30 days or more. Commencing in mid-1996, manufactured housing contracts for which the obligor was in bankruptcy and was current under their bankruptcy payment plan were generally not considered delinquent. Delinquent contracts are subject to acceleration and repossession or foreclosure of the underlying collateral. Losses associated with such actions are charged against applicable reserves upon disposition of the collateral. -11- The following table provides certain information with respect to the delinquency and loss experience of fixed term contracts the Company originated.
At or for the year ended December 31 ---------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Number of contracts delinquent(a) 2.33% 1.92% 1.49% 1.55% 1.86% Repossessed contracts sold(b) 2.05 1.51 1.55 1.87 2.53 Annual net repossession losses(c) .82 .60 .63 .85 1.16 Repossession inventory(d) .69 .51 .43 .51 .58
(a) As a percentage of the total number of contracts serviced at period end (other than contracts already in repossession). (b) As a percentage of the average number of contracts serviced during the period. (c) As a percentage of the average principal amount of contracts serviced during the period. Annual net repossession losses represent the loss amount at the time the repossession is sold, and has not been reduced for amounts subsequently recovered from either customers or investors. (d) As a percentage of the total number of contracts serviced at period end. The Company considers commercial and consumer revolving credit receivables with due and unpaid balances in excess of 30 days to be delinquent. At December 31, 1996 delinquent commercial and consumer revolving credit receivables were .14% and 1.9% of outstandings, respectively. Insurance Through certain subsidiaries, the Company markets physical damage insurance on manufactured homes, certain consumer and equipment products and dealer inventory which collateralize contracts and receivables serviced by the Company. The Company also markets term mortgage and credit life insurance to its manufactured housing, home improvement, home equity and equipment finance customers and provides retail credit insurance to consumer cardholders. In addition, the Company owns a reinsurance subsidiary which functions as a reinsurer for policies written by selected other insurers covering individuals whose contracts are serviced by the Company. The following table provides certain information with respect to net written premiums (gross premiums on new or renewal policies issued less cancellations of previous policies) on policies written -12- by the Company. The Company acts as an agent with respect to the sale of such policies and, in some cases, the Company also acts as reinsurer of such policies.
Year ended December 31 -------------------------------------------- 1996 1995 1994 1993 1992 -------- ------- ------- ------- ------- (dollars in thousands) Net written premiums: Physical damage $ 91,883 $82,438 $63,979 $48,172 $35,500 Credit/Mortgage Insurance 12,125 10,154 7,240 5,683 5,303 -------- ------- ------- ------- ------- Total $104,008 $92,592 $71,219 $53,855 $40,803 ======== ======= ======= ======= =======
Regulation The Company's operations are subject to supervision by various state authorities (typically state mortgage lending, financial institutions, consumer credit and insurance authorities) that generally require that the Company be licensed to conduct its business. In many states, issuance of licenses is dependent upon a finding of public convenience, and of financial responsibility, character and fitness of the applicant. The Company is generally subject to state regulations, examinations and reporting requirements, and licenses are revocable for cause. Contracts insured under the FHA Title I manufactured home and home improvement lending programs are subject to compliance with detailed federal regulations governing originations, servicing, and loss claim payments by the FHA to cover a portion of losses due to default and repossessions or foreclosures. Other governmental programs such as VA also contain similar detailed regulations governing loan origination and servicing responsibilities. The Federal Consumer Credit Protection Act ("FCCPA") requires, among other things, a written disclosure showing the cost of credit to debtors when consumer credit contracts are executed. The Federal Equal Credit Opportunity Act requires certain disclosures to applicants for credit concerning information that is used as a basis for denial of credit and prohibits discrimination against applicants with respect to any aspect of a credit transaction on the basis of sex, race, color, religion, national origin, age, marital status, derivation of income from a public assistance program, or the good faith exercise of a right under the FCCPA, of which it is a part. By virtue of a Federal Trade Commission rule, consumer credit contracts must contain a provision that the holder of the contract is subject to all claims and defenses which the debtor could assert against the seller, but the debtor's recovery under such provisions cannot exceed the amount paid under the contract. The Company is also required to comply with other federal disclosure laws for certain of its lending programs. The home equity lending program, the combination land-and-home program, the -13- land-in-lieu program and the home improvement lending program are subject to the Federal Real Estate Settlement and Procedures Act. In addition, the Company is subject to the reporting requirements of the Home Mortgage Disclosure Act for its manufactured home, purchase money mortgage and home improvement lending products. The construction of manufactured housing is subject to compliance with governmental regulation. Changes in such regulations may occur from time to time and such changes may affect the cost of manufactured housing. The Company cannot predict whether any regulatory changes will occur or what impact such future changes would have on the manufactured housing industry. The Company is subject to state usury laws. Generally, state law has been preempted by federal law with respect to certain manufactured home, mortgage lending and home improvement products, although certain states have enacted legislation superseding federal law. To be eligible for the federal preemption, the Company's contract form must comply with certain consumer protection provisions. The Company offers its products within the limitations set by the state usury laws and federal preemption of these laws. The Company has chartered a limited purpose credit card bank, Green Tree Retail Services Bank, which is subject to regulation by the Federal Deposit Insurance Corporation and the Department of Banking of the State of South Dakota. The ownership of the Bank does not subject the Company to regulation by the Federal Reserve Board as a bank holding company. The Bank is authorized only to engage in the credit card business. The regulatory procedures discussed above are subject to changes by the regulatory authorities. There are no assurances that future regulatory changes will not occur. These regulatory changes could place additional burdens on the Company's programs. Competition and Other Factors The Company is affected by consumer demand for manufactured housing, home equity financing, home improvements, consumer and equipment products, and consumer and commercial revolving credit as well as its insurance products. Consumer and commercial demand, in turn, are partially influenced by regional trends, economic conditions and personal preferences. The Company competes primarily with banks, finance companies, savings and loan associations, and credit unions. Prevailing interest rates are typically affected by economic conditions. Changes in rates, however, generally do not inhibit the Company's ability to compete, although from time to time in particular geographic areas, local competition may choose to offer more favorable rates. The Company competes by offering superior service, prompt credit review, and a variety of financing programs. -14- The Company's business is generally subject to seasonal trends, reflecting the general pattern of sales of manufactured housing and site-built homes. Sales typically peak during the spring and summer seasons and decline to lower levels from mid-November through January. Employees As of December 31, 1996, the Company had 3,769 full-time and 313 part-time employees and considers its employee relations to be satisfactory. None of its employees are represented by a union. Item 2. Properties. At December 31, 1996, the Company operated 51 manufactured housing regional service centers and three commercial finance business centers. Such offices are leased, typically for a term of three to five years, and range in size from 1,700 to 22,000 square feet. The Company also operates a central servicing center in Rapid City, South Dakota. The lease on this facility is for a term of five years with an option to purchase and consists of 137,000 square feet. The Company's home improvement and consumer products divisions lease their main office in Saint Paul, Minnesota. The lease is for a term of five years and consists of 125,000 square feet. (See Note I of Notes to Consolidated Financial Statements for annual rental obligations.) The Company's home equity business has operations in 5 regional locations and 40 regional satellite offices with a service center in Mesa, Arizona which opened in February, 1997. The Company owns the building which houses its equipment finance, retail credit and insurance businesses and its corporate offices. Item 3. Legal Proceedings. The nature of the Company's business is such that it is routinely a party or subject to items of pending or threatened litigation. Although the ultimate outcome of certain of these matters cannot be predicted, management believes, based upon information currently available that the resolution of these routine legal matters will not result in any material adverse effect on its consolidated financial condition. Item 4. Submission of Matters to a Vote of Security Holders. None. -15- PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on the New York and Pacific Stock Exchanges under the symbol "GNT." The following table sets forth, for the periods indicated, the range of the high and low sale prices.
1995 High Low ---- -------- --------- First quarter $ 20-1/2 $ 14-3/8 Second quarter 23-5/16 18-3/4 Third quarter 31-7/16 21-11/16 Fourth quarter 32-3/8 25 1996 High Low ---- -------- --------- First quarter $ 36 $ 23-1/4 Second quarter 35-1/8 30-3/8 Third quarter 39-1/4 30-1/8 Fourth quarter 41-7/8 36-5/8
The above stock prices, as well as all other share and per share amounts referenced in this Annual Report on Form 10-K, have been restated to reflect the two-for-one stock splits effected in the form of stock dividends in June 1994 and October 1995. On February 28, 1997, the Company had approximately 1,058 stockholders of record of its Common Stock including the nominee of The Depository Trust Company which held approximately 132,960,580 shares of Common Stock. The Company has paid cash dividends since December 1986. The 1996 quarterly dividend rate for the first three quarters was $0.0625 per share. In September 1996, the Board of Directors approved an increase in the quarterly dividend rate to $0.075 per share effective for the December 1996 dividend. The payment of future dividends will depend on the Company's financial condition, prospects and such other factors as the Board of Directors may deem relevant. Under a letter of credit agreement, the Company is subject to restrictions limiting the payment of dividends and Common Stock repurchases. At December 31, 1996, such payments were limited to $118,330,000, which represents 50% of consolidated net earnings for the most recently concluded four fiscal quarter periods less dividends paid. -16- Item 6. Selected Financial Data.
Year ended December 31 ---------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (dollars in thousands except per-share data) Income $ 924,111 $ 711,320 $ 497,427 $ 366,680 $ 246,615 Earnings before income taxes 497,961 409,628 302,131 200,537 118,806 Earnings before extraordinary loss(a) 308,736 253,969 181,279 116,423 72,472 Net earnings 308,736 253,969 181,279 116,423 55,015 Earnings per common share: Before extraordinary loss(a) 2.20 1.81 1.31 .90 .61 Net earnings 2.20 1.81 1.31 .90 .45 Cash dividends per common share .26 .20 .12 .09 .08 At year-end: Excess servicing rights receivable $1,651,061 $ 764,617 $ 533,182 $ 843,489 $ 640,647 Total assets 3,791,920 2,383,546 1,771,839 1,739,502 1,167,055 Total debt 762,529 383,546 309,319 515,004 376,043 Allowance for losses on contracts sold 493,876 163,337 84,016 222,135 189,669 Stockholders' equity 1,245,454 925,022 725,891 549,429 298,834
(a) Before extraordinary loss relating to the debt exchange in 1992. Item 7. Management's Discussion and Analysis. Introduction Green Tree Financial Corporation is a diversified financial services company that provides financing for manufactured homes, home equity, home improvements, consumer products and equipment and provides consumer and commercial revolving credit. The Company's insurance agencies market physical damage, term mortgage life insurance and other credit protection relating to the customers' contracts it services. In 1996 the Company continued to diversify its operations in a number of areas, including the addition of a limited-purpose bank for its new consumer revolving credit product as well as the acquisition of an equipment leasing business. -17- The Company records "net gains on contract sales" at the time of sale of its fixed term contracts and defers service income, recognizing it as servicing is performed. Income from floorplan and asset-based financing is recognized as realized. Net gains on contract sales are an amount equal to the present value of the expected excess servicing rights receivable to be collected during the term of the contracts, plus or minus any premiums or discounts realized on the sale of the contracts and less any selling expenses. "Excess servicing rights receivable" represents cash expected to be received by the Company over the life of the contracts discounted to a present value. The subordinated certificates retained by the Company from the securitized Net Interest Margin Certificate ("NIM Certificate") sales are shown net of projected losses and are included in excess servicing rights receivable. Excess servicing rights receivable, excluding the subordinated certificates, is calculated by aggregating the contractual payments to be received pursuant to the contracts and subtracting: (i) the estimated amount to be remitted to the investors/owners of the contracts, (ii) the estimated amount that will not be collected as a result of prepayments, (iii) the estimated amount to be remitted for FHA insurance and other credit enhancement fees and (iv) the estimated amount that represents deferred service income. Deferred service income represents the amount that will be earned by the Company for servicing the contracts. Concurrently with recognizing such gains, the Company also records the present value of excess servicing rights as an asset on the Company's balance sheet. Excess servicing rights receivable is calculated using prepayment, default, and interest rate assumptions which the Company believes market participants would use. Excess servicing rights receivable has not been reduced for potential loss provisions of the sales. Such rights are subordinated to the rights of investors/owners of the contracts. The Company believes that the excess servicing rights receivable recognized at the time of sale does not exceed the amount that would be received if it were sold in the marketplace. In initially valuing its excess servicing rights receivable, the Company establishes an allowance for expected losses, based upon historical experience and management's best estimate of future credit losses likely to be incurred. The amount of this allowance is reviewed quarterly and adjustments are made if actual experience or other factors indicate management's estimate of losses should be revised. While the Company retains a substantial amount of risk of default on the loan portfolios that it sells, such risk has been substantially reduced through the sales of the NIM Certificates. The Company believes that its allowance for losses on contracts sold is adequate and consistent with current economic conditions as well as historical default and loss experiences of the Company's entire loan portfolio. The allowance for losses on contracts sold is shown separately as a liability. The allowance has been discounted using an interest rate equivalent to the risk-free market rate for securities with a duration consistent with the estimated timing of losses. The outstanding security balances of -18- contracts at December 31, 1996 were $1,046,490,000 of GNMA certificates and $16,784,024,000 related to securitized transactions and whole loan sales. The Company records the amount to be remitted to the investors/owners of the contracts or investor certificates for the activity related to the current month, payable the next month, as "investor payable" and it is shown separately as a liability on the Company's balance sheet. The Company has provided the investors in pools of contracts with a variety of additional forms of credit enhancements on its securitized sales. These credit enhancements include corporate guarantees, letters of credit and surety bonds that provide limited recourse to the Company, and letters of credit that, if drawn, are entitled to reimbursement only from the future excess cash flows of the underlying transactions. Furthermore, certain securitized sales structures use cash reserve funds and certain cash flows from the underlying pool of contracts as additional credit enhancement. The carrying value of the subordinated interest in the NIM Certificates retained by the Company is determined using prepayment, default and interest rate assumptions generally consistent with those used in the marketplace. The subordinated certificates are shown net of the effect of projected losses. Payments on the subordinated certificates will not be made until such time as the senior certificateholders have been paid all principal and interest due them under the terms of the transactions. As such, interest on the subordinated certificates will continue to accrue to the outstanding balance until payments commence. Green Tree collects a monthly servicing fee on the underlying contract balance to the extent that adequate funds are available based on cash flows provided by each underlying securitized sale. The Company's expectations used in calculating its excess servicing rights receivable and allowance for losses on contracts sold, as well as the value of the subordinated interest in the NIM Certificates, are subject to volatility that could materially affect operating results. Prepayments resulting from obligor mobility, general and regional economic conditions, and prevailing interest rates, as well as actual losses incurred, may vary from the performance the Company projects. The Company recognizes the impact of adverse prepayment and loss experience by recording a charge to current earnings. The Company reflects favorable portfolio experience prospectively as realized. -19- Results of Operations The following table shows, for the periods indicated, the percentage relationships to income of certain income and expense items and the percentage changes in such items from period to period.
Period-to-period As a percentage of increase (decrease) income for the year ------------------- ended December 31 1995 1994 --------------------------- to to 1996 1995 1994 1996 1995 ---- ---- ---- ---- ---- Income: Net gains on contract sales 101.9% 94.4% 91.4% 40.2% 47.7% Provision for losses on contract sales (38.1) (31.4) (27.0) 57.7 65.9 Interest 23.3 24.8 22.4 22.3 58.0 Service 7.9 7.5 8.1 36.8 33.7 Commissions and other 5.0 4.7 5.1 38.5 29.3 ----- ----- ----- Total income 100.0% 100.0% 100.0% ===== ===== ===== Expenses: Interest 7.6% 8.1% 8.4% 22.2 37.7 Cost of servicing 5.7 5.5 6.2 35.4 26.9 General and administrative 32.8 28.8 24.7 47.7 67.1 Earnings before income taxes 53.9 57.6 60.7 21.6 35.6 Net earnings 33.4 35.7 36.4 21.6 40.1
Net gains on contract sales increased 40.2% and 47.7% for the years ended December 31, 1996 and 1995, respectively, as a result of increased dollar volume of contracts sold, and longer average terms on the manufactured home, home equity and home improvement contracts sold in 1996. This increase in net gains on contract sales was partially offset by decreased interest rate spreads on the contracts sold and a change in mix of contracts sold. During 1996 and 1995, total contract sales increased $3,314,270,000 or 72.1% and $829,317,000, or 22.0%, respectively. The Company's net gains on contract sales in 1995 reflect higher interest rate spreads on contracts sold while 1994's net gain on contract sales was partially offset by decreased interest rate spreads on contracts sold. Prevailing interest rates are typically affected by economic conditions. Changes in interest rates generally do not inhibit the Company's ability to compete, although from time to time, in particular geographic areas, local competition may be able to offer more favorable rates. Because of the size of the excess servicing spread (which enables the Company to absorb changes in interest rates) and the relatively short period of time between origination -20- and sale of contracts, the Company's ability to sell contracts is generally not affected by changes in interest rates, although the amount of earnings may be affected. Average excess servicing spreads were 3.6%, 3.8% and 3.1% for 1996, 1995 and 1994, respectively. Excess servicing spreads decreased during 1996 as the rates on the Company's sales of securitized loans increased faster than the rates on the contracts originated by the Company, partially offset by a changing mix of contracts sold. The increase in the provision for losses on contract sales of 57.7% in 1996 reflects the growth in total contract sales and the Company's increased provision for losses on manufactured housing contract sales as a percentage of contracts sold. The increased loss provision as a percentage of manufactured housing contracts sold is a result of increasing average contract terms and the changing mix of originations to loans which have a lower down payment. The 65.9% increase in the provision for losses on contract sales during 1995 is a result of increasing average contract terms and the changing mix of originations to a higher percentage of conventional contracts and to loans which have a lower down payment. An important factor in controlling the Company's credit risk is the geographic dispersion of the portfolio. At December 31, 1996, no state accounted for more than 10% of all contracts serviced by the Company. The Company continually monitors its dispersion of contracts as economic downturns are often more severely felt in certain geographic areas than others. In previous years the Company sold a substantial portion of its excess servicing rights receivable, representing net cash flows retained from the securitization of its manufactured housing contracts, in the form of securitized NIM Certificates through public offerings. Green Tree Securitized Net Interest Margin Trusts 1994-A, 1994-B and 1995-A, sold certificates representing approximately 72% to 78% of the estimated present value of future excess servicing cash flows derived from the Company's sales of certain manufactured housing contracts between 1978 and 1995. The estimated present value of these future excess servicing cash flows was previously recorded on the Company's balance sheet as part of "Excess servicing rights receivable", "Contracts and collateral" and "Allowance for losses on contracts sold". The remaining interests retained by the Company, representing subordinated certificates, continue to be recorded as part of excess servicing rights receivable and are shown net of projected losses. The manufactured housing market experienced a 7% increase in new home shipments during 1996 compared to 1995. The Company continues to benefit from this increase as its dollar volume of MH contract originations rose 17.4% during 1996 over 1995 to $4,882,018,000, and believes that it is maintaining its market share of contracts for financing new manufactured homes. The Company's dollar volume of new manufactured housing contract originations rose 15.9% during -21- 1996 over 1995. The dollar volume of previously owned MH contract originations also rose 39.1% year over year. Although small compared to total volume, the dollar volume of refinanced contracts decreased in 1996 compared to 1995. In addition to the increase in the number of new MH contracts originated by the Company, the average contract size has also increased due to a shift in the Company's manufactured home financing to more land-and-home contracts and price increases by the MH manufacturers. The dollar volume of home equity/home improvement contracts rose 138% during 1996 over 1995 to $1,490,720,000. Consumer products and other contract originations rose 153% to $1,192,579,000 in 1996. The overall growth in these originations resulted from expanding the number of relationships with dealers and the growth in the Company's home equity originations network. Interest income is realized from the amortization of the present value discount relating to excess servicing rights receivable, commercial finance receivables, cash deposits and short-term investments, as well as contract and other revolving credit inventory. Interest income grew 22.3% during 1996 over 1995 primarily from increased earnings on the Company's commercial finance receivables. Amortization of the present value discount during 1996 increased in comparison to 1995 due to the growth of the Company's average excess servicing rights receivable. Contracts held for sale during the year was higher on average than during 1995 due to higher production levels, resulting in an increase in interest income. Interest income increased 58% for the year ended December 31, 1995 compared to 1994. Interest income relating to the increased earnings on the Company's commercial finance receivables during 1995 increased compared to 1994. The Company's interest income was lower in 1994 primarily as a result of the NIM certificate sales. Earnings on short-term investment activity relating to the cash generated by the NIM Certificate sales and an increase in average contracts held for sale due to substantially higher production levels during 1994 also partially offset that decrease. Service income increased in 1996, 1995 and 1994 by 36.8%, 33.7% and 28.3%, respectively. These increases resulted from the 38.8%, 36.5% and 32.4% growth in the Company's total average servicing portfolio for 1996, 1995 and 1994, respectively. The Company expects service income to continue to increase as its portfolio grows. Commissions and other income, which includes commissions earned on new insurance policies written and renewals on existing policies, as well as other income from late fees, grew during 1996, 1995 and 1994 primarily as a result of the increase in net written insurance premiums as the Company's contract originations and servicing portfolio continue to grow. -22- Interest expense increased 22.2% and 37.7% during 1996 and 1995, respectively, as a result of the Company maintaining a significantly higher level of borrowings to fund its loan originations and commercial finance portfolio. In 1994 interest expense was lower as the Company maintained a lower level of borrowings to fund its loan originations and as a result of converting a substantial portion of its excess servicing rights receivable to cash through the NIM Certificate sales. Green Tree's dollar amount of cost of servicing has increased over the past three years as its total average servicing portfolio during the years ended December 31, 1996, 1995 and 1994 grew 38.8%, 36.5% and 32.4%, respectively. The Company's cost of servicing as a percentage of contracts serviced has decreased over each of the past three years. General and administrative expenses rose 47.7% and 67.1% during 1996 and 1995, respectively. The primary reason for these increases in both 1996 and 1995 relates to the compensation of the chief executive officer pursuant to the terms of an employment agreement, the majority of such expense being paid in stock. As a percentage of contract originations, however, general and administrative expenses have remained relatively constant. The Company's effective tax rate during 1996 and 1995 was 38%. The effective tax rate in 1994 was 40%. The Company is affected by consumer demand for manufactured housing, home equity financing, home improvements, and consumer and equipment products and consumer and commercial revolving credit as well as its insurance products. Consumer and commercial demand, in turn, are partially influenced by regional trends, economic conditions and personal preferences. The Company can make no prediction about any particular geographic area in which it does business. These regional effects, however, are mitigated by the national geographic dispersion of its servicing portfolio. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) was issued in October 1995 and requires that the impact of the fair value of employee stock-based compensation plans on net income and earnings per share be disclosed on a pro forma basis in a footnote to the consolidated financial statements for awards granted in fiscal years beginning after December 15, 1994, if the accounting for such awards continues to be in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Alternatively, SFAS No. 123 permits a company to record the fair value of employee stock-based compensation plans as a component of compensation expense in the statement of income as of the date of grant of awards related to such plans. Adoption of SFAS No. 123 is required for fiscal years beginning after December -23- 15, 1994. In adopting SFAS No. 123, the Company has disclosed the impact on net income and earnings per share on a pro forma basis in a footnote to the consolidated financial statements. Inflation has not had a material effect on the Company's income or earnings over the past three fiscal years. Capital Resources and Liquidity The Company's business requires continued access to the capital markets for the purchase, warehousing and sale of contracts. To satisfy these needs, the Company employs a variety of capital resources. Historically, the most important liquidity source for the Company has been its ability to sell contracts in the secondary markets through loan securitizations. Under certain securitized sales structures, corporate guarantees, bank letters of credit, surety bonds, cash deposits or other equivalent collateral have been provided by the Company as credit enhancements. The Company analyzes the cash flows unique to each transaction, as well as the marketability and earnings potential of such transactions when choosing the appropriate structure for each securitized loan sale. The structure of each securitized sale depends, to a great extent, on conditions of the fixed income markets at the time of sale as well as cost considerations and availability and effectiveness of the various enhancement methods. During 1996, the Company used a senior/subordinated structure for each of its ten manufactured home loan sales and enhanced a portion of the subordinated certificates sold with a corporate guarantee. During 1996, the Company's home improvement and home equity loan sales included two separate but cross-collateralized loan pools, both of which employed a senior/subordinated structure with a limited guarantee on a portion of the subordinate certificates. The Company's first quarter sale of consumer products and equipment finance loans employed a multi-class credit tranched grantor trust structure with a limited corporate guarantee on the most junior tranche. In the second and third quarters of 1996, the Company's consumer products and equipment finance loan sales employed a multi-class credit tranched owner trust structure with floating rate senior certificates and a limited corporate guarantee on the most junior fixed rate certificates. In addition, the Company completed, in the fourth quarter of 1996, a sale of consumer product, equipment finance, non-lien home improvement and certain home equity loans which employed a multi-class credit-tranched owner trust structure with fixed and floating rate senior certificates and a limited corporate guarantee on the most junior fixed rate certificates. The Company also sold in the fourth quarter of 1996 approximately $500 million of floorplan and asset-based receivables through a revolving trust. -24- Another liquidity source for the Company is its ability to sell portions of its excess servicing rights receivable in the form of securitized NIM Certificates. During 1995 and 1994 the Company sold $308,000,000 and $600,400,000 of NIM Certificates, respectively. These certificates represent approximately 72% to 78% of the estimated present value of future excess servicing cash flows derived from the Company's sales of certain manufactured housing contracts between 1978 and 1995. Net proceeds to the Company from these sales were used to reduce short-term borrowings supporting ongoing loan originations. Servicing fees and net interest payments collected increased during the year ended December 31, 1996 and 1995 and decreased during 1994 as a result of the timing and size of the NIM Certificate sales, the proceeds of which are shown separately on the Company's statements of cash flows. Net interest payments collected on the transactions underlying the NIM Certificates, after certain deductions, are remitted directly to the senior certificateholders. Payments on the subordinated certificates will not commence until the senior certificateholders have been paid in full. For the year ended December 31, 1996, 1995 and 1994, servicing fees and net interest payments collected consist of servicing fees collected on the NIM Certificates, plus servicing fees and net interest payments on all existing securitizations in which the Company has not yet sold a portion of the related excess servicing rights. Net principal payments collected have been positive in each of the last three years as a result of an increase in the contract principal payments collected by the Company as of the end of each year but not yet remitted to the investors/owners of the contracts. These increases are a result of customer payoffs and the growth of the Company's servicing portfolio. Interest income on cash, commercial finance receivables and investments increased during 1996 and 1995 primarily as a result of the increase in commercial finance receivables outstanding. Gross commercial finance receivables outstanding at December 31, 1996, 1995 and 1994 were $1.1 billion, $574 million and $168 million, respectively. Repossession losses, net of recoveries, increased in 1996 due to the impact of the Company's growing portfolio. Reported losses were reduced in 1996, 1995 and 1994 as a result of the sale of the NIM Certificates. There were no additional sales of NIM Certificates in 1996. Repossession losses on contracts whose net cash flows were sold as part of these transactions are not borne by the Company but, instead, reduce the amount of cash available to pay the senior certificateholders. To the extent that such losses should exceed projected levels, the impact would first be borne by Green Tree through charges to the valuation of its subordinated certificates, and thereafter by the holders of the senior certificates, not through charges to the allowance for losses on -25- contracts sold. In the future, repossession losses net of recoveries will continue to include activity relating to all future securitizations and GNMA pools in which the Company does not sell or has not yet sold a portion of the related excess servicing rights. During 1995, the Company repurchased 2,051,000 shares of its common stock for $53,913,000. These shares are currently held as treasury shares. Dividends paid by the Company increased 30% in 1996 compared to 1995 as the Company's 1996 quarterly average dividend rate increased 29% over the 1995 rate. Net cash provided by operating activities increased significantly in 1996 compared to 1995 as the Company began securitizing its home equity, consumer and equipment loans. Net cash from operating activities decreased in 1995 over 1994 as a result of increased volumes of contract purchases and commercial finance loans disbursed. In 1994, proceeds from the sale of contracts was greater than the purchase of contracts held for sale as the Company began the securitization of home improvement loans. In 1996, net cash used for investing activities included the acquisition of the net assets of FINOVA Acquisition I, Inc. In 1995 net cash used for investing activities included leasehold improvements on its Rapid City servicing center and in 1994, the renovation of certain floors in its corporate office building and the buyout and upgrade of the Company's mainframe computer. Net cash provided by financing activities was positive in 1996 as borrowings on credit facilities and proceeds from the issuance of common stock exceeded debt repayments and dividends. Cash used for financing activities in 1995 was a result of the common stock repurchases, a 73.3% increase in the common stock dividend rate and the retirement of the senior subordinated debentures in June. The Company used cash from financing activities during 1994 as it repaid all of its borrowings on credit facilities and increased its common stock dividend rate 33.3% in May. The Company has a $500,000,000 unsecured bank credit agreement. This credit facility is a three-year committed revolving line of credit which expires April 15, 1999. In addition, the Company currently has $1.8 billion in master repurchase agreements with various investment banking firms for the purpose of financing its contract and commercial finance loan production. At December 31, 1996, the Company had $39,000,000 of borrowings outstanding under the unsecured bank credit agreement and no borrowings outstanding under the repurchase agreements. There was $1,800,000,000 available, subject to the availability of eligible collateral. The master repurchase agreements generally provide for annual terms that are extended each quarter by mutual agreement of the parties for an additional annual term based upon receipt of updated quarterly financial information from the Company. The Company believes that these agreements will continue to be renewed. -26- The Company also has a commercial paper program through which it is authorized to issue up to $1 billion in notes of varying terms (not to exceed 270 days) to meet its liquidity needs. This program is backed by the bank credit agreement and master repurchase agreements referred to above. As of December 31, 1996, the Company had issued and outstanding, net of interest discount, $431,242,000 in notes under this program. Commercial paper is expected to be an ongoing source of liquidity for purposes of meeting the Company's funding needs between sales of its contract and commercial loan production. Other Matters Certain information included in this Form 10-K and Annual Report may include "forward-looking" information, as defined in the Private Securities Litigation Reform Act of 1995 (the "Act"). Such forward-looking information may involve risks or uncertainties which are described in the Cautionary Statements contained in the Company's Form 8-K filed with the Securities and Exchange Commission on July 12, 1996. Investors are specifically referred to the Cautionary Statements for a discussion of factors which could affect the Company's operations and financial performance. Factors referenced in the Cautionary Statements include: prevailing economic conditions; ability to access capital resources; short-term interest rate fluctuations; the level of defaults and prepayments on loans made by the Company; competition; and regulatory changes. Any forward looking information is based upon management's reasonable estimate of future results or trends. The Company does not undertake, and the Act specifically relieves the Company from, any obligation to update any forward-looking statements. -27- Item 8. Financial Statements and Supplementary Data. GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K AND INDEPENDENT AUDITORS' REPORT ------------------------------------- YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -------------------------------------------- -28- INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Green Tree Financial Corporation Saint Paul, Minnesota: We have audited the accompanying consolidated balance sheets of Green Tree Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996 and the financial statement schedule listed in the Index at Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Green Tree Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Minneapolis, Minnesota January 24, 1997 -29- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ---------------------------
December 31 -------------------------------- 1996 1995 --------------- --------------- ASSETS: Cash and cash equivalents (Note A) $ 442,071,000 $ 295,767,000 Cash deposits, restricted (Note F) 171,484,000 159,311,000 Other investments (Note A) 11,925,000 19,880,000 Receivables: Excess servicing rights (Notes A and B) 1,651,061,000 764,617,000 Lease (Note B) 570,407,000 -- Commercial finance (Note B) 212,920,000 141,793,000 Revolving credit (Note B) 40,803,000 -- Other 85,503,000 52,546,000 Contracts and collateral (Notes C, E and F) 453,008,000 884,303,000 Property, furniture and fixtures (Note D) 77,859,000 57,104,000 Goodwill (Note A) 58,950,000 -- Other assets 15,929,000 8,225,000 -------------- -------------- Total assets $3,791,920,000 $2,383,546,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY: Notes payable (Note E) $ 472,181,000 $ 93,662,000 Senior/Senior subordinated notes (Note E) 290,348,000 289,884,000 Allowance for losses on contracts sold (Notes A and F) 493,876,000 163,337,000 Accounts payable and accrued liabilities 404,427,000 266,131,000 Investor payable 346,272,000 238,448,000 Income taxes, principally deferred (Note K) 539,362,000 407,062,000 -------------- -------------- Total liabilities 2,546,466,000 1,458,524,000 Commitments and contingencies (Notes F and I) Stockholders' equity (Notes E and G): Common stock, $.01 par; authorized 400,000,000 and 150,000,000 shares, respectively, issued 139,782,706 and 137,534,266 shares, respectively 1,398,000 1,375,000 Additional paid-in capital 373,573,000 323,564,000 Retained earnings 926,695,000 653,996,000 Minimum pension liability adjustments (2,299,000) -- -------------- -------------- 1,299,367,000 978,935,000 Less treasury stock, 2,051,000 shares at cost (53,913,000) (53,913,000) -------------- -------------- Total stockholders' equity 1,245,454,000 925,022,000 -------------- -------------- Total liabilities and stockholders' equity $3,791,920,000 $2,383,546,000 ============== ==============
See notes to consolidated financial statements. -30- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
Year ended December 31 --------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- INCOME: Net gains on contract sales $ 941,486,000 $ 671,741,000 $ 454,831,000 Provision for losses on contract sales (351,743,000) (223,039,000) (134,416,000) Interest 215,315,000 175,990,000 111,376,000 Service 73,263,000 53,572,000 40,077,000 Commissions and other 45,790,000 33,056,000 25,559,000 ------------- ------------- ------------- 924,111,000 711,320,000 497,427,000 EXPENSES: Interest 70,050,000 57,313,000 41,619,000 Cost of servicing 53,022,000 39,168,000 30,857,000 General and administrative 303,078,000 205,211,000 122,820,000 ------------- ------------- ------------- 426,150,000 301,692,000 195,296,000 ------------- ------------- ------------- EARNINGS BEFORE INCOME TAXES 497,961,000 409,628,000 302,131,000 INCOME TAXES (Note K) 189,225,000 155,659,000 120,852,000 ------------- ------------- ------------- NET EARNINGS $ 308,736,000 $ 253,969,000 $ 181,279,000 ============= ============= ============= EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $2.20 $1.81 $1.31 ===== ===== ===== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 140,561,830 140,089,656 138,668,338
See notes to consolidated financial statements. -31- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -----------------------------------------------
Additional Minimum Total Common paid-in Treasury Retained pension stockholders' stock capital stock earning liability equity ---------- --------- --------- --------- ---------- -------------- (dollars in thousands) BALANCES, December 31, 1993 $1,340 $285,726 $ -- $262,363 $ -- $ 549,429 Common stock issuance of 1,200,000 shares 12 11,006 -- -- -- 11,018 Minimum pension liability adjustments -- -- Dividends on common stock -- -- -- (15,835) -- (15,835) Net earnings -- -- -- 181,279 -- 181,279 ------ -------- -------- -------- ------- ---------- BALANCES, December 31, 1994 1,352 296,732 -- 427,807 -- 725,891 Common stock issuance of 2,300,000 shares 23 26,832 -- -- -- 26,855 Cost of 2,051,000 shares of treasury stock acquired -- -- (53,913) -- -- (53,913) Minimum pension liability adjustments -- -- Dividends on common stock -- -- -- (27,780) -- (27,780) Net earnings -- -- -- 253,969 -- 253,969 ------ -------- -------- -------- ------- ---------- BALANCES, December 31, 1995 1,375 323,564 (53,913) 653,996 -- 925,022 Common stock issuance of 2,300,000 shares 23 50,009 -- -- -- 50,032 Minimum pension liability adjustments (2,299) (2,299) Dividends on common stock -- -- -- (36,037) -- (36,037) Net earnings -- -- -- 308,736 -- 308,736 ------ -------- -------- -------- ------- ---------- BALANCES, December 31, 1996 $1,398 $373,573 $(53,913) $926,695 $(2,299) $1,245,454 ====== ======== ======== ======== ======= ==========
See notes to consolidated financial statements. -32- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
Year ended December 31 ------------------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Servicing fees and net interest payments collected $ 253,753,000 $ 165,886,000 $ 93,119,000 Net proceeds from sale of net interest margin certificates -- 302,312,000 583,800,000 Net principal payments collected 77,810,000 40,571,000 693,000 Interest on contracts 56,857,000 70,169,000 61,007,000 Interest on cash, commercial finance receivables and investments 69,685,000 55,328,000 15,002,000 Commissions 26,340,000 18,616,000 16,609,000 Other 6,161,000 2,558,000 2,491,000 --------------- --------------- --------------- 490,606,000 655,440,000 772,721,000 --------------- --------------- --------------- Cash paid to employees and suppliers (252,625,000) (171,935,000) (136,796,000) Interest paid on debt (66,381,000) (55,214,000) (38,604,000) Repossession losses net of recoveries (35,831,000) (6,351,000) (1,538,000) Income taxes paid (44,182,000) (37,496,000) (28,385,000) FHA insurance premiums (2,377,000) (2,074,000) (2,181,000) --------------- --------------- --------------- (401,396,000) (273,070,000) (207,504,000) --------------- --------------- --------------- NET CASH PROVIDED BY OPERATIONS 89,210,000 382,370,000 565,217,000 Purchase of contracts held for sale (7,564,745,000) (5,210,560,000) (3,718,545,000) Net proceeds from sale of contracts held for sale 7,864,008,000 4,562,468,000 3,764,569,000 Principal collections on contracts held for sale 144,716,000 120,989,000 71,382,000 Commercial finance loans disbursed (2,868,508,000) (1,579,568,000) (368,873,000) Principal collections on commercial finance loans 2,289,916,000 1,187,431,000 233,771,000 Net proceeds from sale of commercial finance loans 499,115,000 426,304,000 -- Cash deposits provided as credit enhancements (27,285,000) (18,956,000) (36,176,000) Cash deposits returned 7,612,000 5,702,000 14,936,000 --------------- --------------- --------------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 434,039,000 (123,820,000) 526,281,000 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of subsidiary (620,566,000) -- -- Purchase of property, furniture and fixtures (31,231,000) (31,478,000) (18,911,000) Net sales (purchases) of investment securities 7,955,000 1,040,000 (1,904,000) --------------- --------------- --------------- NET CASH USED FOR INVESTING ACTIVITIES (643,842,000) (30,438,000) (20,815,000) --------------- --------------- ---------------
(continued) -33- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (continued)
Year ended December 31 -------------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on credit facilities 7,514,398,000 4,633,237,000 1,418,011,000 Repayments on credit facilities (7,128,379,000) (4,539,575,000) (1,624,922,000) Common stock issued 6,125,000 2,346,000 2,562,000 Common stock repurchased -- (53,913,000) -- Dividends paid (36,037,000) (27,780,000) (15,835,000) Payments of debt -- (20,246,000) -- --------------- --------------- --------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 356,107,000 (5,931,000) (220,184,000) --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 146,304,000 (160,189,000) 285,282,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 295,767,000 455,956,000 170,674,000 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 442,071,000 $ 295,767,000 $ 455,956,000 =============== =============== =============== RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net earnings $ 308,736,000 $ 253,969,000 $ 181,279,000 Deferred taxes 133,630,000 109,686,000 90,572,000 Depreciation and amortization 22,427,000 13,518,000 9,762,000 Net proceeds from sale of net interest margin certificates -- 302,312,000 583,800,000 Net contract payments collected, less excess servicing rights recorded (394,021,000) (331,882,000) (302,610,000) Amortization of deferred service income (30,594,000) (14,689,000) (6,599,000) Net amortization of present value discount (77,223,000) (51,267,000) (33,316,000) Net increase in cash deposits (19,673,000) (13,254,000) (21,240,000) Sales and principal collections, net of purchase of contracts held for sale 443,978,000 (527,103,000) 117,406,000 Commercial finance loans disbursed, net of sales and principal collections (79,477,000) 34,167,000 (135,102,000) Net discount on sale of loans 50,900,000 38,852,000 36,816,000 Increase in tax accrual 55,595,000 45,973,000 30,280,000 Other 19,761,000 15,898,000 (24,767,000) --------------- --------------- --------------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 434,039,000 $ (123,820,000) $ 526,281,000 =============== =============== ===============
See notes to consolidated financial statements. -34- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -------------------------------------------- A. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. Securitized Asset Sales The Company originates sales contracts for manufactured homes, home improvements, consumer products and equipment financing, and also originates home equity and mortgage loans. These contracts and loans are typically sold at or near par to investors. The Company retains the servicing rights and participation in certain excess cash flows from the contracts and loans. The present value of expected cash flows from this participation which exceeds normal servicing fees is recorded at the time of sale as "excess servicing rights receivable." The excess servicing rights receivable is calculated using prepayment, default and interest rate assumptions which the Company believes market participants would use for similar instruments. The excess servicing rights receivable has not been reduced for potential losses under recourse provisions of the sales. The allowance for losses on contracts sold is shown separately as a liability on the Company's consolidated balance sheet. For contracts sold prior to October 1, 1992, the allowance is shown on a nondiscounted basis. For contracts sold after September 30, 1992, the allowance has been discounted using an interest rate equivalent to the risk-free market rate for securities with a duration consistent with the estimated timing of losses. In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent periods, these estimates are revised as necessary for any reductions in expected future cash flows arising from adverse prepayment and loss experience by recording a charge to current earnings. The Company has also sold portions of its excess servicing rights receivable to investors in the form of securitized Net Interest Margin ("NIM Certificates") Certificates. The subordinated certificates retained by the Company are included in excess servicing rights receivable at present value, net of expected losses. No gain or loss was recorded as a result of these -35- transactions, such certificates being valued in the marketplace using prepayment, default and interest rate assumptions generally consistent with those recorded by the Company. Interest payments received on the contracts, less interest payments paid to investors (including payments on the NIM Certificates), are reported on the consolidated statements of cash flows as "servicing fees and net interest payments collected." Principal payments received on the contracts, less non-defeasance principal payments paid to investors, are reported as "net principal payments collected" on the consolidated statements of cash flows. Interest income and service income are recognized by systematically amortizing the present value discount and deferred service income, respectively. The Company defers service income and recognizes income over the life of the contracts. The Company discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. The cash flows were discounted to present value using discount rates which averaged approximately 9.2% in 1996, 9.4% in 1995 and 9.5% in 1994. The Company has developed its assumptions based on experience with its own portfolio, available market data (including market estimates utilized in the sales of the NIM Certificates) and ongoing consultation with its investment bankers. The Company believes that the assumptions used in estimating cash flows are similar to those which would be used by an outside investor. The Company's commercial finance receivables generally represent revolving credit and asset-based financing arrangements with dealers, manufacturers and other commercial entities for which a loss reserve is established at the time of origination. During 1996 and 1995 a portion of these receivables were sold in the form of a revolving Master Trust. No gain or loss was recorded at the time of sale. The Company's policy is to record income on these receivables as realized. Depreciation Property, furniture and fixtures are carried at cost and are depreciated over their estimated useful lives on a straight-line basis. Earnings per Common and Common Equivalent Share Earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during each year. Common Stock equivalents consist of the dilutive effect of Common Stock which may be issued upon exercise of stock options. All share and per-share amounts have been restated to reflect the two-for-one stock splits the Company effected in June 1994 and October 1995. Earnings per share and fully diluted earnings per share are substantially the same. -36- Stock Based Compensation Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide pro forma disclosure provisions of SFAS No. 123. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid temporary investments purchased with a maturity of three months or less to be cash equivalents. These temporary investments include United States Treasury funds, commercial paper or bank money market accounts. At December 31, 1996 and 1995, cash of approximately $341,936,000 and $239,617,000, respectively, was held in trust for subsequent payment to investors. In addition, cash of approximately $3,101,000 and $2,809,000 was restricted and held by the Company's subsidiaries pursuant to master repurchase agreements and government requirements at December 31, 1996 and 1995, respectively. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. Other Investments Other investments consist of highly liquid investments with original maturities of more than three months. Other investments are held in United States Treasury Bills, United States Government and Agency Bonds, and certificates of deposit, and are stated at cost plus accrued interest, which approximates market value. At December 31, 1996 and 1995, investments of approximately $11,925,000 and $19,880,000, respectively, were held in trust for FDIC requirements and policy and claim reserves and a master repurchase agreement for the Company's bank and insurance subsidiaries. Allowance for Losses The allowance for losses on contracts sold represents the Company's best estimate of future credit losses likely to be incurred over -37- the entire life of contracts sold. Amounts representing losses on the contracts underlying the NIM Certificates are reflected in the carrying value of the subordinated certificates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. Receivables Excess Servicing Rights Receivable Excess servicing rights receivable consists of net excess cash expected to be collected over the life of the contracts sold. In previous years, portions of these gross cash flows were sold to investors through securitized NIM Certificate sales in which the Company retained a subordinated interest. As of December 31 excess servicing rights receivable consisted of:
Excess Servicing Gross NIM Rights Cash Flows Certificates Receivable ---------- ------------ ---------- (dollars in thousands) 1996 - ---- Gross cash flows receivable on contracts sold $ 6,954,175 $(2,631,994) $ 4,322,181 Less: Prepayment reserve (3,187,749) 989,733 (2,198,016) FHA insurance and other fees (39,835) 31,022 (8,813) Deferred service income (471,609) 190,308 (281,301) Discount to present value (952,514) 447,217 (505,297) Subordinated interest in NIM Certificates -- 322,307 322,307 ----------- ----------- ----------- $ 2,302,468 $ (651,407) $ 1,651,061 =========== =========== =========== 1995 - ---- Gross cash flows receivable on contracts sold $ 4,706,540 $(3,299,121) $ 1,407,419 Less: Prepayment reserve (1,918,532) 1,243,757 (674,775) FHA insurance and other fees (52,369) 41,269 (11,100) Deferred service income (337,184) 244,732 (92,452) Discount to present value (769,214) 586,082 (183,132) Subordinated interest in NIM Certificates -- 318,657 318,657 ----------- ----------- ----------- $ 1,629,241 $ (864,624) $ 764,617 =========== =========== ===========
-38- In previous years, the Company sold a substantial portion of its excess servicing rights receivable in the form of securitized NIM Certificates. The Securitized Net Interest Margin Trusts sold certificates representing approximately 72% to 78% of the estimated present value of future excess servicing cash flows derived from the Company's sales of certain manufactured housing contracts between 1978 and 1995. The remaining interests in the Net Interest Margin Trusts were retained by the Company as subordinated interests. This subordinated interest will continue to accrue interest as no payments of principal or interest will be made until the senior certificateholders have been paid in full. The carrying value of the subordinated interest is analyzed quarterly to determine the impact, if any, of adverse prepayment or loss experience. However, the carrying value will continue to reflect the discount rates utilized at the time of sale. The carrying value of excess servicing rights receivable is analyzed quarterly to determine the impact of prepayments, if any. During the years ended December 31, 1996, 1995 and 1994, the Company sold $7,913,357,000, $4,586,851,000 and $3,724,102,000, respectively, of contracts in various securitized transactions, and during 1995 and 1994 the Company sold $308,000,000 and $600,400,000 of NIM Certificates, respectively. At December 31, 1996 and 1995, the outstanding principal balance of all loans sold was $16,784,024,000 and $10,941,384,000, respectively. During the years ended December 31, 1995 and 1994, the Company sold $12,236,000 and $45,668,000, respectively, of GNMA guaranteed certificates secured by FHA- insured and VA-guaranteed contracts. There were no such sales made by the Company in 1996. At December 31, 1996 and 1995, the outstanding principal balance on GNMA certificates issued by the Company was $1,046,490,000 and $1,290,750,000, respectively. Lease Receivables Generally all lease receivables are direct financing leases as defined in FASB No. 13. The carrying value of lease receivables represents the present value of both the future minimum lease payments and related residual value less an allowance for expected losses. The allowance at December 31, 1996 was $13,334,000. Revenue is recognized in interest income as a constant percentage return on the asset carrying value. Commercial Finance Receivables The Company's commercial finance receivables generally represent dealer floorplan and asset-based financing arrangements with dealers, manufacturers and other commercial entities. Commercial -39- real estate loans are also included in the commercial finance receivables. A loss reserve is established at the time of origination. As of December 31, 1996 and 1995 the outstanding principal balance on commercial finance receivables serviced by the Company was $1,067,600,000 and $574,100,000, respectively. The commercial finance allowance for doubtful accounts pertaining to unsold commercial finance receivables at December 31, 1996 and 1995 was $687,000 and $1,071,000, respectively. During 1996 and 1995 the Company sold $500,300,000 and $427,800,000, respectively, of these receivables in the form of a revolving Master Trust. Revolving Credit Receivables - ---------------------------- Revolving credit receivables consists of retail credit card arrangements with merchants and dealers and their customers. As of December 31, 1996, the year in which this business commenced, the outstanding balance totaled $40,803,000. The allowance for doubtful accounts for revolving credit receivables is adjusted monthly based on the aging of the revolving credit receivables. The allowance for doubtful accounts was $239,000 at December 31, 1996.
C. Contracts and Collateral Contracts and collateral consist of: December 31 ---------------------------- 1996 1995 ------------ ------------ Contracts held for sale $359,858,000 $844,573,000 Other contracts held 25,680,000 17,095,000 Collateral in process of liquidation 57,155,000 12,418,000 Contracts held as collateral 10,315,000 10,217,000 ------------ ------------ $453,008,000 $884,303,000 ============ ============
Collateral in process of liquidation includes collateral related only to contracts which have not been included in the MH securitizations underlying the NIM Certificate sales. Gross collateral in process of liquidation was $166,241,000 and $89,007,000 as of December 31, 1996 and 1995, respectively. The aggregate method is used in determining the lower of cost or market value of contracts held for sale and contracts held as collateral. See fair value disclosure of financial instruments in Note H. Potential losses on the liquidation of the collateral are included in determining the allowance for losses on contracts sold with recourse (Notes F and H). -40- D. Property, Furniture and Fixtures Property, furniture and fixtures consist of:
December 31 Estimated ---------------------------- useful life 1996 1995 ----------- ------------- ------------- Cost: Building 35 years $ 20,648,000 $ 21,453,000 Furniture and equipment 3-7 years 87,686,000 54,086,000 Leasehold improvements 3-10 years 11,779,000 6,391,000 Land and improvements 1,724,000 1,724,000 ------------ ------------ 121,837,000 83,654,000 Less accumulated depreciation (43,978,000) (26,550,000) ------------ ------------ $ 77,859,000 $ 57,104,000 ============ ============
Depreciation expense for 1996, 1995 and 1994 was $17,932,000, $10,956,000 and $5,656,000, respectively. E. Debt The Company has a $1,000,000,000 commercial paper program which is used primarily for purposes of financing its loan production inventory prior to sale of those receivables in the form of securitization. This program is backed by both committed bank facilities and master repurchase agreements with various investment banking firms. As of December 31, 1996 the Company had notes outstanding net of interest discount totaling $431,242,000 which bore interest at a weighted average discount rate of 5.68%. The Company has a three-year unsecured revolving line of credit totaling $500,000,000 which expires April 15, 1999. As of December 31, 1996 it had borrowings totaling $39,000,000 outstanding under this facility with a weighted average interest rate of 5.63%. The credit agreement contains certain restrictive covenants which include maintenance of a minimum net worth (as defined in the agreement) and a debt to net worth ratio not to exceed 5 to 1. In addition, master repurchase agreements are in place with a variety of investment banking firms totaling $1,800,000,000 which are subject to the availability of eligible collateral. There were no outstanding balances under these facilities as of December 31, 1996. The Company has a $2,000,000 promissory note which contains a balloon payment due on April 9, 2001, bearing interest at an annual rate of 2%. A balance of $1,939,000 was outstanding on this note at December 31, 1996. The Company also has a $250,000,000 medium term note program under which it may issue senior notes bearing either fixed or floating rates of interest with maturities in excess of nine months. Notes were outstanding under this program as of December 31, 1996 totaling $26,650,000 bearing a weighted average rate of interest of 7.27% with maturities ranging from 1998 to 2003. Interest on these notes is payable semi-annually. -41- The Senior Subordinated Notes due June 1, 2002 were issued in connection with a debt exchange completed in April 1992. The effective interest rate on these notes is 10.8%. There is unamortized original issue discount of $3,556,000 and $4,020,000 at December 31, 1996 and 1995, respectively. The Company must maintain net worth of $80,000,000 or will be required, through the use of a sinking fund, to redeem $25,000,000 on such contingent sinking fund payment date. Interest on these notes is payable semi-annually. At December 31, 1996, aggregate maturities of debt for the following five years are $24,572,000, payable as follows: $0 in 1997, $8,000,000 in 1998, $12,000,000 in 1999, $3,000,000 in 2000, and $1,572,000 in 2001.
Debt is as follows: December 31 -------------------------- 1996 1995 ------------ ------------ Notes payable $472,181,000 $ 93,662,000 Senior/Senior Subordinated Notes 290,348,000 289,884,000 ------------ ------------ $762,529,000 $383,546,000 ============ ============
F. Allowance for Losses on Contracts Sold In initially valuing its excess servicing rights receivable at the time of securitization, the Company establishes an allowance for expected losses on contracts sold. The Company calculates that allowance on the basis of historical experience and management's best estimate of future credit losses likely to be incurred. The allowance is reviewed quarterly and adjustments are made if actual experience or other factors indicate management's estimate of losses should be revised. While the Company retains a substantial amount of risk of default on the loan portfolios that it sells, such risk has been substantially reduced through the sales of the NIM Certificates. The GNMA guaranteed certificates which have been sold by the Company are secured by FHA-insured and VA-guaranteed contracts. The majority of credit losses incurred on these contracts are covered by FHA insurance or VA guarantees with the remainder borne by the Company. In addition to its excess servicing rights receivable, the Company has provided a variety of credit enhancements on its securitized sales. These credit enhancements have included corporate guarantees, letters of credit and surety bonds that provide limited recourse to the Company, and letters of credit that, if drawn, are entitled to reimbursement only from the future excess cash flows of the underlying transactions. Furthermore, certain securitized sales structures use cash reserve funds and certain cash flows from the underlying pool of contracts as the credit enhancement. At December 31, 1996 and 1995, the Company had bank letters of credit and surety bonds outstanding of $140,972,000 and $156,617,000, respectively. Cash deposits held in interest bearing accounts -42- totaled $171,484,000 and $159,311,000, and contracts pledged aggregated $10,315,000 and $10,217,000 at December 31, 1996 and 1995, respectively, and are maintained as part of credit enhancement features under certain sales structures. Allowances are provided for the Company's best estimate of future credit losses likely to be incurred over the entire life of the contracts. Estimated losses are based on an analysis of the underlying loans and do not reflect the maximum recourse provided to investors. The following table presents an analysis of the allowance for losses on contracts sold for 1996, 1995 and 1994.
Gross NIM Net Allowance Certificates Allowance -------------- --------------------- -------------- 1996 - ---- Allowance at beginning of year $ 497,491,000 $(334,154,000) $ 163,337,000 Provision for losses 351,743,000 -- 351,743,000 Losses net of recoveries (129,696,000) 93,865,000 (35,831,000) Amortization of present value discount on loss reserve 30,560,000 (15,933,000) 14,627,000 ------------- ------------- ------------ Allowance at end of year $ 750,098,000 $(256,222,000) $ 493,876,000 ============= ============= ============= 1995 - ---- Allowance at beginning of year $ 320,299,000 $(236,283,000) $ 84,016,000 Sale of NIM Certificates -- (143,364,000) (143,364,000) Provision for losses 223,039,000 -- 223,039,000 Losses net of recoveries (62,179,000) 55,828,000 (6,351,000) Amortization of present value discount on loss reserve 16,332,000 (10,335,000) 5,997,000 ------------- ------------- ------------- Allowance at end of year $ 497,491,000 $(334,154,000) $ 163,337,000 ============= ============= ============= 1994 - ---- Allowance at beginning of year $ 222,135,000 $ -- $ 222,135,000 Sale of NIM Certificates -- (273,093,000) (273,093,000) Provision for losses 134,416,000 -- 134,416,000 Losses net of recoveries (45,406,000) 43,868,000 (1,538,000) Amortization of present value discount on loss reserve 9,154,000 (7,058,000) 2,096,000 ------------- ------------- ------------- Allowance at end of year $ 320,299,000 $(236,283,000) $ 84,016,000 ============= ============= =============
-43- G. Stockholders' Equity Common Stock In May 1996, the Board of Directors and shareholders approved the authorization of 250,000,000 additional shares of Common Stock for general corporate purposes, including stock dividends, raising additional capital, and issuances pursuant to employee stock option plans and possible future acquisitions. In May 1994 and September 1995, the Board of Directors declared two-for-one stock splits, in the form of stock dividends, payable on June 30, 1994 and October 15, 1995 to stockholders of record as of June 15, 1994 and September 30, 1995, respectively. All references in the consolidated financial statements and notes with regard to number of shares, stock options and related prices, and per-share amounts have been restated to give retroactive effect to the stock splits. In February 1995, the Company's Board of Directors approved and authorized the repurchase of up to 7,000,000 shares of the Company's Common Stock from time to time in the open market or in private transactions. Preferred Stock The Company's authorized shares of capital stock include 15,000,000 shares of stock designated as Preferred Stock. The Company had previously designated a series of Junior Preferred Stock in connection with its Stockholders Rights Plan (the "Plan"). As of October 31, 1995 the term of the Plan expired and the Company determined not to extend the term of the Plan. At December 31, 1996 and 1995 there were no shares of Preferred Stock outstanding. Rights In October 1985, the Company issued one Preferred Stock purchase right for each share of Common Stock and amended the rights in August 1990 in connection with the Plan. As of October 31, 1995 the rights expired as the term of the Plan expired. Stock Bonus Plan In 1988, the Company's stockholders approved a key executive compensation stock bonus plan. Shares issued under this plan are pursuant to an employment agreement and the stock is valued at $2.96875 per share which represents the closing market price of the stock on the date of the employment agreement. Total shares issued under this plan during 1996, 1995 and 1994 were 1,998,745, 1,349,216 and 886,428, respectively. In 1997, shares will be issued for the 1996 year under the employment agreement which expires on December 31, 1996. -44- Stock Option Plans In 1988, the Company's stockholders approved two stock option plans: an employee stock option plan and an outside director plan. In 1992, the Board of Directors approved a supplemental stock option plan for its outside directors and in 1995, the Company's stockholders approved an Employee Stock Incentive Plan. In 1996, the Company's stockholders approved a chief executive plan which included a two million share stock option plan. The options granted under this plan provide for an exercise price equal to the fair market value of the Company's stock on February 9, 1996, of $30.875. The term of the option, which commences in 1997, is for ten years, with a five-year vesting schedule providing vesting of 20 percent per year for each full year of service. Options for 18,709,884 shares were available for future grant under these plans. The Company's Board of Directors has reserved 13,833,752 shares for future issuance under all plans as of December 31, 1996. A summary of the stock option plan activity is as follows:
Number of Weighted Average shares Exercise price ----------- ---------------- Outstanding at December 31, 1993 5,843,536 $ 4.19 Granted 168,000 14.28 Exercised (699,740) 4.07 Expired (165,328) 4.58 ---------- Outstanding at December 31, 1994 5,146,468 4.45 Granted 3,015,000 24.00 Exercised (1,794,936) 4.39 Expired (110,000) 24.00 ---------- Outstanding at December 31, 1995 6,256,532 13.60 Granted 5,632,500 32.02 Exercised (1,196,500) 4.69 Expired (620,500) 26.49 ---------- Outstanding at December 31, 1996 10,072,032 $23.91 ==========
Of the 10,072,032 options outstanding at December 31, 1996, 9,952,032 options relate to the employee and chief executive stock option plans and 120,000 options relate to the outside director plan. The exercise price per share represents the market value of the Company's stock on the date of grant except for certain options granted in 1996 and 1995. The option price per share on 850,000 options granted in 1996 represents approximately 77% of the market value of the Company's stock on the date of grant and 370,000 options granted in 1995 represents approximately 79% of the market value of the Company's stock on the date of grant. -45- A summary of stock options outstanding at December 31, 1996 is as follows:
Options Outstanding: Range of Number Remaining Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price --------------- ----------- ---------------- ---------------- $ 2.96-23.37 2,342,032 5.41 $ 5.90 24.00-24.00 2,134,000 8.57 24.00 25.00-30.62 1,894,000 9.58 29.27 30.87-38.37 3,702,000 9.27 32.39 ------------ --------- ----- ------ $ 2.96-38.37 10,072,032 8.28 $23.91
Options Exercisable:
Range of Number Weighted Average Exercise Prices Outstanding Exercise Price --------------- ----------- ---------------- $ 2.96-23.37 1,880,368 $ 4.37 24.00-24.00 413,200 24.00 25.00-30.62 33,000 25.00 30.87-38.37 0 -- ------------ --------- ------ $ 2.96-38.37 2,326,568 $ 8.15
The Company applies Accounting Principles Board Opinion No. 25, and related Interpretations in accounting for its stock incentive plans. Proceeds from stock options exercised are credited to common stock and paid in capital. There are no charges or credits to expense with respect to the granting or exercise of options that were issued at fair market value on their respective dates of grant. Had compensation costs for the Company's stock- based compensation plans been determined consistent with Statement of Financial Accounting Standards No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below.
1996 1995 ------------ ------------ Net Earnings As Reported $308,736,000 $253,969,000 Pro Forma 298,147,000 250,805,000 Primary Earnings Per Share As Reported $ 2.20 $ 1.81 Pro Forma 2.12 1.79 Fully Diluted Earnings Per Share As Reported $ 2.19 $ 1.81 Pro Forma 2.12 1.79
-46- The fair value for each option granted in 1996 and 1995 utilized in the foregoing pro forma amounts is estimated on the date of grant using an option pricing model. The model incorporates the following assumptions in 1996 and 1995: .8% dividend yield; 39.7% and 38.45% expected volatility, respectively; risk-free interest rates ranging from 5.2% to 7.7%; and expected option term beyond vesting of 2 years. Dividends During 1996, 1995 and 1994 the Company declared and paid dividends of $.26, $.20 and $.12 per share, respectively, on its Common Stock. Under a letter of credit agreement, the Company is subject to restrictions limiting the payment of dividends and common stock repurchases. At December 31, 1996, such payments were limited to $118,330,000, which represents 50% of consolidated net earnings for the most recently concluded four fiscal quarter period less dividends paid. H. Fair Value Disclosure of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose the estimated fair values of its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. Cash and Cash Equivalents, Cash Deposits and Other Investments The carrying amount of cash and cash equivalents, cash deposits and other investments approximates fair value because they generally mature in 90 days or less and do not present unanticipated credit concerns. Excess Servicing Rights Receivable Excess servicing rights receivable is calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar instruments at the time of sale. Projected performance is monitored on an ongoing basis. The initially established discount rate is fixed for the life of the transaction. As such, the fair value of excess servicing rights receivable primarily includes consideration of a current discount rate to be applied to the financial instrument as a whole. The Company has consulted with investment bankers and obtained an estimate of a market discount rate. Utilizing this market discount rate, and such other assumptions as the Company believes market participants would use for similar instruments, the Company has estimated the fair value of its excess servicing rights receivable, excluding its subordinated interest in the NIM Certificates, to approximate its carrying value, shown net of the related allowance for losses which is disclosed separately as a liability on the balance sheet. -47- The carrying value of excess servicing relating to the subordinated interest retained in the NIM Certificates sold during 1994 and 1995 is calculated using prepayment and default assumptions which the Company believes market participants would use currently, but using the interest rate determined at the time of sale. For purposes of computing fair value, the Company consulted with its investment bankers and obtained an estimate of market interest rate as of December 31, 1996 and 1995. Using these rates, the carrying value exceeds the fair value for this component of excess servicing rights receivable by $13,080,000 at December 31, 1996, and at December 31, 1995, the fair value exceeded the carrying value by $56,600,000. Leases Receivables Lease receivables generally consist of a large number of individually small finance leases with average remaining terms of less than 36 months. Fair value approximates carrying value. Commercial Finance Receivables Commercial finance receivable consists primarily of loans which reprice monthly, typically in accordance with the prime lending rate offered by banks. Given this repricing structure, the Company estimates the fair value of these receivables to approximate their carrying value. Revolving Credit Receivables Revolving credit receivables consist of retail credit and the applicable interest from credit card agreements applied to revolving credit. The Company estimates the fair value of these receivables to approximate their carrying value. Contracts Held for Sale and as Collateral Contracts held for sale and as collateral are generally recent originations which will be sold during the following quarter. The Company does not charge origination fees and, as such, its contracts have origination rates generally in excess of rates on the securities into which they will be pooled. Since these contracts have not been converted into securitized pools, the Company estimates the fair value to be the carrying amount plus the cost of origination. Collateral in Process of Liquidation Collateral in the process of liquidation is valued on an individual unit basis after inspection of such collateral. Shown net of the related allowance for losses on contracts sold, fair value approximates carrying value. -48- Other Contracts Held Pursuant to investor sale agreements, certain contracts are repurchased by the Company as a result of delinquency before they are repossessed and are included in other contracts held. The loss has been estimated on an aggregate basis and is included on the balance sheet in allowance for losses on contracts sold. Notes Payable Notes payable consists of amounts payable under the Company's commercial paper program, line of credit or repurchase agreements and, given its short-term nature, is at a rate which approximates market. As such, fair value approximates the carrying amount. Senior Notes and Senior Subordinated Notes The fair value of the Company's senior notes is estimated based on their quoted market price or on the current rates offered to the Company for debt of a similar maturity. The Company's senior subordinated notes are valued at quoted market prices. The carrying amounts and estimated fair values of the Company's financial assets and liabilities are as follows:
December 31, 1996 December 31, 1995 ----------------- ----------------- Estimated Estimated Carrying fair Carrying fair amount value amount value -------- ----- -------- ----- (dollars in thousands) Financial assets: Cash and cash equivalents, cash deposits and other investments $ 625,480 $ 625,480 $474,958 $474,958 Excess servicing rights receivable (net of allowance for losses) 1,176,467 1,163,387 602,728 659,328 Lease receivables 570,407 570,407 -- -- Commercial finance receivables 212,920 212,920 141,793 141,793 Revolving credit receivables 40,803 40,803 -- -- Contracts held for sale and as collateral 370,174 379,058 854,790 880,434 Collateral in process of liquidation 37,873 37,873 10,970 10,970 Other contracts held 25,679 16,890 17,095 11,945 Financial liabilities: Notes payable 472,181 472,181 93,662 93,662 Senior notes/senior subordinated notes 290,348 331,580 289,884 344,778
-49- Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. The estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future loss and prepayment experience, current economic conditions, specific risk characteristics and other factors. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a regional branch network with significant dealer relationships and proprietary credit scoring systems, which contribute to the Company's ongoing profitability and neither of which is considered a financial instrument. I. Commitments and Contingencies Lease Commitments At December 31, 1996, aggregate minimum rental commitments under noncancelable leases having terms of more than one year were $25,628,000, payable $7,523,000 (1997), $6,446,000 (1998), $5,154,000 (1999), $3,785,000 (2000), and $2,720,000 (2001). Total rental expense for the years ended December 31, 1996, 1995 and 1994 was $8,664,000, $6,101,000 and $5,065,000, respectively. These leases are for office facilities and equipment, and many contain either clauses for cost of living increases and/or options to renew or terminate the lease. Litigation The nature of the Company's business is such that it is routinely a party or subject to items of pending or threatened litigation. Although the ultimate outcome of certain of these matters cannot be predicted, management believes, based upon information currently available, that the resolution of these routine legal matters will not result in any material adverse effect on its consolidated financial condition. J. Benefit Plans The Company has a qualified noncontributory defined benefit pension plan covering substantially all of its employees over 21 years of age. The plan's benefits are based on years of service and the employee's compensation. The plan is funded annually based on the maximum amount that can be deducted for federal income tax purposes. The assets of the plan are primarily invested in common stock, corporate bonds and cash equivalents. As of December 31, 1996 and 1995, net assets -50- available for plan benefits were $7,075,000 and $7,790,000, and the accumulated benefit obligation was $8,341,000 and $6,393,000, respectively. As of December 31, 1996 and 1995, the projected benefit obligation of the plan was $17,034,000 and $12,466,000, respectively. In addition, the Company maintains a nonqualified pension plan for certain key employees as designated by the Board of Directors. This plan is not currently funded and the projected benefit obligation at December 31, 1996 and 1995 was $22,841,000 and $13,023,000, respectively. Total pension expense for the plans in 1996, 1995 and 1994 was $5,347,000, $3,091,000 and $3,585,000, respectively. The Company also has a 401(k) Retirement Savings Plan available to all eligible employees. To be eligible for the plan, the employee must be at least 21 years of age and have completed six months of employment at Green Tree during which the employee worked at least 1,000 hours. Eligible employees may contribute to the plan up to 15% of their earnings with a maximum of $9,500 for 1996 based on the Internal Revenue Service annual contribution limit. The Company will match 50% of the employee contributions for an amount up to 6% of each employee's earnings. Contributions are invested at the direction of the employee in one or more funds. Company contributions vest after three years. Company contributions to the plan were $1,316,000, $859,000 and $713,000 in 1996, 1995 and 1994, respectively. K. Income Taxes Income taxes consist of the following:
Year ended December 31 ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Current: Federal $ 51,908,000 $ 43,883,000 $ 27,077,000 State 3,687,000 2,090,000 3,203,000 ------------ ------------ ------------ 55,595,000 45,973,000 30,280,000 Deferred: Federal 114,334,000 92,870,000 76,100,000 State 19,296,000 16,816,000 14,472,000 ------------ ------------ ------------ 133,630,000 109,686,000 90,572,000 ------------ ------------ ------------ $189,225,000 $155,659,000 $120,852,000 ============ ============ ============
Deferred income taxes are provided for temporary differences between pretax income for financial reporting purposes and taxable income. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below. -51-
December 31 -------------------------- 1996 1995 ------------ ------------ Deferred tax liabilities: Excess servicing rights $527,051,000 $402,461,000 Other 40,772,000 22,933,000 ------------ ------------ Gross deferred tax liabilities 567,823,000 425,394,000 ------------ ------------ Deferred tax assets: Net operating loss carryforward 20,347,000 12,960,000 Other 8,114,000 6,703,000 ------------ ------------ Gross deferred tax assets 28,461,000 19,663,000 Valuation allowance -- -- ------------ ------------ Gross deferred tax assets, net of valuation 28,461,000 19,663,000 ------------ ------------ Net deferred tax liability $539,362,000 $405,731,000 ============ ============
At December 31, 1996, the Company has net operating loss carryforwards for federal income tax purposes of approximately $58,000,000 which are available to offset future federal taxable income and expire no earlier than 2003. No valuation allowance was required as of December 31, 1996 or 1995 since it is likely that the deferred tax asset will be realized against future taxable income. A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
Year ended December 31 ------------------------- 1996 1995 1994 ------- ------- ------- Statutory rate 35.0% 35.0% 35.0% State tax, net of federal benefit 3.0 3.0 3.8 Other -- -- 1.2 ---- ---- ---- 38.0% 38.0% 40.0% ==== ==== ====
M. Recent Accounting Pronouncement In June 1996, the Financial Accounting Standards Board issued No. 125 (SFAS No. 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial-components approach that focuses on control. Management of the Company does not expect that adoption of SFAS No. 125 will have a material impact on the Company's financial position, results of operations or liquidity. -52- N. Business Acquisition On December 1, 1996, the Company purchased the Net Assets of FINOVA Acquisition I, Inc. for approximately $620,000,000. The business acquired under a stock purchase agreement provides equipment leases, loans and related services to manufacturers and dealers and their customers. Goodwill totaling $59,201,000, was recorded as part of this acquisition. The December, 1996 financial operations of this leasing/loan business is included in the Company's December 31, 1996 financial statements. -53- QUARTERLY RESULTS OF OPERATIONS (unaudited) -------------------------------------------
First Second Third Fourth quarter quarter quarter quarter -------- -------- -------- -------- (dollars in thousands except per-share amounts) 1996: Income $168,118 $196,102 $219,665 $340,226 Net earnings 66,362 75,422 85,581 81,434 Net earnings per share .48 .54 .61 .58 1995: Income $128,199 $153,274 $174,374 $255,473 Net earnings 50,729 61,712 72,037 69,491 Net earnings per share .36 .44 .51 .50 1994: Income $104,798 $112,289 $126,049 $154,291 Net earnings 38,492 44,226 52,066 46,495 Net earnings per share .28 .32 .37 .34
Item 9. Disagreements on Accounting and Financial Disclosures. - --------------------------------------------------------------- None. -54- PART III -------- Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------- Pursuant to General Instruction G(3), reference is made to the information contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before May 1, 1997. Item 11. Executive Compensation. - --------------------------------- Pursuant to General Instruction G(3), reference is made to the information contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before May 1, 1997. Item 12. Security Ownership of Certain Beneficial Owners and - ------------------------------------------------------------ Management. - ----------- Pursuant to General Instruction G(3), reference is made to the information contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before May 1, 1997. Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------- None. -55- PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on - ---------------------------------------------------------------- Form 8-K. - --------- (a)(l) Financial statements The following consolidated financial statements of Green Tree Financial Corporation and subsidiaries are included in Part II, Item 8 of this report:
Page(s) ------- Independent Auditors' Report 29 Consolidated Balance Sheets - December 31, 1996 and 1995 30 Consolidated Statements of Operations - years ended December 31, 1996, 1995 and 1994 31 Consolidated Statements of Stockholders' Equity - years ended December 31, 1996, 1995 and 1994 32 Consolidated Statements of Cash Flows - years ended December 31, 1996, 1995 and 1994 33 Notes to Consolidated Financial Statements 35 (2) Financial statement schedules The following consolidated financial statement schedule of Green Tree Financial Corporation and subsidiaries is included in Part IV of this report: Schedule II - Valuation and qualifying accounts 61
Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information required is included in the consolidated financial statements or notes thereto. (3) Exhibits Exhibit No. ------- 3(a) Certificate of Incorporation of Green Tree Financial Corporation (incorporated by reference to the Company's Registration Statement on Form S-1; File No.33-60869). 3(b) Certificate of Merger of Incorporation of Green Tree Financial Corporation, as filed with the Delaware Secretary of State on June 30, 1995 (incorporated by reference to the Company's Registration Statement on Form S-1; File No. 33- 60869.) -56- 3(c) Bylaws of Green Tree Financial Corporation (incorporated by reference to Company's Registration Statement on Form S-1; File No. 33-60869). 4(a) Indenture dated as of March 15, 1992 relating to $287,500,000 of 10 1/4% Senior Subordinated Notes due June 1, 2002 (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249). 4(b) Indenture dated as of September 1, 1992 relating to $250,000,000 of Medium-Term Notes, Series A, Due Nine Months or More From Date of Issue (incorporated by reference to the Company's Registration Statement on Form S-3; File No. 33-51804). 10(a) Company's Key Executive Bonus Program (incorporated by reference to the Company's Registration Statement on Form S-l; File No. 2 -82880). 10(b) Employment Agreement, dated April 20, 1991 between the Company and Lawrence M. Coss (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249). 10(c) Green Tree Financial Corporation 1987 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249). 10(d) Green Tree Financial Corporation Key Executive Stock Bonus Plan (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249). 10(e) Master Repurchase Agreement dated as of August 1, 1990 between Green Tree Finance Corp.-Three and Merrill Lynch Mortgage Capital Inc. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990; File No. 0-11652); as amended by Amendment to the Master Repurchase Agreement dated May 10, 1993 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994; File No. 0-11652); as amended by Amendment to the Master Repurchase Agreement dated August 8, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995; File No. 0-11652). 10(f) Credit Agreement dated as of April 16, 1996 between Green Tree Financial Corporation and The -57- First National Bank of Chicago (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996; File No. 1-08916). 10(g) Insurance and Indemnity Agreement dated as of February 13, 1992 among Green Tree Financial Corporation, MaHCS Guaranty Corporation and Financial Security Assurance Inc. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991; File No. 0-11652); as amended by Amended and Restated Insurance and Indemnity Agreement dated March 11, 1994 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994; File No. 0-11652). 10(h) Master Repurchase Agreement dated as of October 15, 1992 between Green Tree Finance Corp.-Five and Lehman Commercial Paper, Inc. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 0-11652); as amended by Amendment to the Master Repurchase Agreement dated June 30, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995; File No. 0-11652). 10(i) 401(k) Plan Trust Agreement effective as of October 1, 1992 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 0-11652); as amended by Amendment to the Plan Agreement dated November 23, 1994 (filed herewith); as amended by Amendment to the Plan Agreement dated August 22, 1996 (filed herewith); as amended by Amendment to the Plan Agreement dated December 30, 1996 (filed herewith). 10(j) Green Tree Financial Corporation 1992 Supplemental Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993; File No. 0-11652). 10(k) Master Repurchase Agreement dated as of September 1, 1995 between Merrill Lynch Mortgage Capital, Inc. and Green Tree Financial Corporation (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995; File No. 1-08916). 10(l) Master Repurchase Agreement dated as of November 9, 1995 between Salomon Brothers Holding Company and Green Tree Financial Corporation (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995; File No. 1-08916). -58- 10(m) Green Tree Financial Corporation 1995 Employee Stock Incentive Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995; File No. 1-08916). 10(n) Employment Agreement, dated February 9, 1996 between the Company and Lawrence Coss and related Noncompetition Agreement, dated February 9, 1996 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996; File No. 1-08916). 10(o) Green Tree Financial Corporation Chief Executive Cash Bonus and Stock Option Plan and related Stock Option Agreement, dated February 9, 1996 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996; File No. 1-08916). 10(p) Green Tree Financial Corporation 1996 restated Supplemental Pension Plan dated May 15, 1996 (filed herewith). 11(a) Computation of Primary Earnings Per Share (filed herewith). 11(b) Computation of Fully Diluted Earnings Per Share (filed herewith). 12 Computation of Ratio of Earnings to Fixed Charges (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23 Consent of KPMG Peat Marwick LLP (filed herewith). 24 Powers of Attorney (filed herewith). 27 Financial Data Schedule (filed herewith). PURSUANT TO ITEM 601(b)(4) OF REGULATION S-K, THERE HAS BEEN EXCLUDED FROM THE EXHIBITS FILED PURSUANT TO THIS REPORT, INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF LONG-TERM DEBT OF THE COMPANY WHERE THE TOTAL AMOUNT OF THE SECURITIES AUTHORIZED UNDER SUCH INSTRUMENTS DOES NOT EXCEED TEN PERCENT OF THE TOTAL ASSETS OF THE COMPANY. THE COMPANY HEREBY AGREES TO FURNISH A COPY OF ANY SUCH INSTRUMENTS TO THE COMMISSION UPON REQUEST. (b) Reports on Form 8-K None. -59- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Green Tree Financial Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GREEN TREE FINANCIAL CORPORATION By: /s/Lawrence M. Coss By: /s/Edward L. Finn -------------------------- --------------------------- Lawrence M. Coss Edward L. Finn Chairman and Chief Executive Vice President Executive Officer and Chief Financial (principal executive Officer (principal officer) financial officer) By: /s/Scott T. Young ---------------------------- Scott T. Young Vice President and Controller (principal accounting officer) Dated: March 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/Lawrence M. Coss - -------------------------- Lawrence M. Coss, Director March 14, 1997 /s/Richard G. Evans - -------------------------- Richard G. Evans, Director March 14, 1997 /s/Robert D. Potts - ------------------------- Robert D. Potts, Director March 14, 1997 By: /s/Joel H. Gottesman ------------------------- Joel H. Gottesman Attorney-in-Fact W. Max McGee, Director ) Dated: March 14, 1997 ) Robert S. Nickoloff, Director ) -60- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS -----------------------------------------------
Additions- Balance at reductions Balance beginning to income at end Description of period recognized Deductions of period - -------------------------------- ---------- ---------- ------------- --------- (dollars in thousands) Valuation and qualifying accounts which are deducted from the assets to which they apply: - ---------------------------- Deferred service income: Year ended December 31, 1996 $ 92,452 $219,958 $ 31,109(b) $ 281,301 Year ended December 31, 1995 68,918 146,237 111,731(a) 92,452 10,972(b) Year ended December 31, 1994 161,407 124,015 212,243(a) 68,918 4,261(b) Reserves which support balance sheet caption reserves: - ----------------------------------- Allowance for losses on contracts sold with recourse: Year ended December 31, 1996 $163,337 $351,743 $ 35,831(c) $ 493,876 14,627(b) Year ended December 31, 1995 84,016 223,039 143,364(a) 163,337 5,997(b) 6,351(c) Year ended December 31, 1994 222,135 134,416 273,093(a) 84,016 2,096(b) 1,538(c)
Notes: (a) Reduced as a result of the NIM Certificate sales. (b) Amortization and discount. (c) Amounts charged off. -61-
GREEN TREE FINANCIAL CORPORATION Securities and Exchange Commission Form 10-K (For the Fiscal Year Ended December 31, 1996) EXHIBIT INDEX Exhibit No. Exhibit Page No. - ----------- ------- -------- 10(i) Restated First Amendment of Green Tree Financial Corporation 401(k) Plan Trust Agreement, dated November 23, 1994, Second Amendment of Green Tree Financial Corporation 401(k) Plan Trust Agreement, dated August 22, 1996 Third Amendment to Green Tree Financial Corporation 401(k) Plan Trust Agreement dated December 30, 1996 63 10(p) Green Tree Financial Corporation 1996 Restated Supplemental Pension Plan, dated May 15, 1996 74 11(a) Computation of Primary Earnings Per Share 81 11(b) Computation of Fully Diluted Earnings Per Share 82 12 Computation of Ratio of Earnings to Fixed Charges 83 21 Subsidiaries of Registrant 84 23 Consent of KPMG Peat Marwick LLP 86 24 Powers of Attorney 87 27 Financial Data Schedule 88
-62- EX-10.(I) 2 RESTATED FIRST AMEND. OF GREEN TREE FINANCIAL Exhibit 10(i) ------------- RESTATED FIRST AMENDMENT OF GREEN TREE FINANCIAL CORPORATION 401(k) PLAN TRUST AGREEMENT THIS AGREEMENT, Made and entered into as of November 23, 1994, by and between GREEN TREE FINANCIAL CORPORATION, a Minnesota corporation (the "Principal Sponsor"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking association organized under the laws of the United States, as trustee (together with its successors, the "Trustee"); WITNESSETH: That WHEREAS, The Principal Sponsor has heretofore established and maintained a profit sharing plan (the "Plan") which, in most recent amended and restated form, is embodied in a document dated October 1, 1992 and entitled "Green Tree Financial Corporation 401(k) Plan Trust Agreement" (the "Plan Statement"); and WHEREAS, The Principal Sponsor has reserved to itself the power to make amendments of the Plan Statement; and NOW, THEREFORE, The Plan Statement is hereby amended as follows: 1. COMMITTEE NAME CHANGE. Effective January 1, 1994, Section 1.1.6 of the Plan Statement shall be amended by replacing "401(k)" with the word "Benefits." 2. ANNUAL COMPENSATION LIMIT. Effective for determining the amount of Recognized Compensation during Plan Years beginning on or after January 1, 1994, Section 1.1.24(h) of the Plan Statement shall be amended to read in full as follows: (h) Annual Maximum. A Participant's Recognized Compensation for a Plan Year shall not exceed the annual compensation limit under section 401(a)(17) of the Code. In determining a Participant's Recognized Compensation, the rules of section 414(q)(6) of the Code apply, except that in applying such rules, the term "family" shall include only the spouse of the Participant and lineal descendants of the Participant who have not attained age nineteen (19) years before the close of the Plan Year; provided, however, that the rule in this sentence shall not apply to the Seven Thousand Dollar ($7,000) limit specified in Section 2.4. If Participants are aggregated as such family members (and do not otherwise agree in writing), the Recognized Compensation of each family member shall equal the annual compensation limit under section 401(a)(17) of the Code multiplied by a fraction, the numerator of which is such family member's Recognized Compensation (before application of such annual compensation limit) and the denominator of which is the total Recognized Compensation (before application of such -63- annual compensation limit) of all such family members. For purposes of the foregoing, the annual compensation limit under section 401(a)(17) of the Code shall be Two Hundred Thousand Dollars ($200,000) (as adjusted under the Code for cost of living increases) for Plan Years beginning before January 1, 1994, and shall be One Hundred and Fifty Thousand Dollars ($150,000) (as so adjusted) for Plan Years beginning on or after January 1, 1994. 3. COVERAGE OF EMPLOYEES. Effective for determining which persons are employed in Recognized Employment during Plan Years beginning on or after October 1, 1992, Section 1.1.25 of the Plan Statement shall be amended by adding at the end of the introductory sentence the words "employment classified by the Employer as". 4. ADP TESTING. Effective for testing the amount of elective contributions and other optional amounts during Plan Years beginning on or after January 1, 1994, Section 2.6.2(b) of the Plan Statement shall be amended to read in full as follows: (b) Family Member. If a highly compensated eligible employee is subject to the family aggregation rules of section 414(q)(6) of the Code because such employee is either a five percent (5%) owner or one of the ten (10) most highly compensated employees (as defined in Appendix D to this Plan Statement), the combined deferral percentage for the family group (which is treated as one highly compensated eligible employee) shall be determined by combining the amounts described in Section 2.6.1(c)(i) and by combining the compensation described in section 2.6.1(d) of all family members who are eligible employees. The family members who are aggregated with respect to a highly compensated eligible employee shall be disregarded as separate eligible employees in determining the average deferral percentage of highly compensated eligible employees and the average deferral percentage of all other eligible employees. If an eligible employee is required to be aggregated as a member of more than one family group in the Plan, all eligible employees who are members of those family groups that include that eligible employee are aggregated as one family group. With respect to any highly compensated eligible employee, "family" shall mean the employee's spouse and lineal ascendants and descendants and the spouses of such lineal ascendants and descendants. The annual compensation limit under section 401(a)(17) of the Code applies to the above deferral percentage determination except that for purposes of that limit, the term "family" shall include only the spouse of the eligible employee and lineal descendants of the eligible employee who have not attained age nineteen (19) years before the close of that Plan Year. For purposes of the foregoing, the annual compensation limit under section 401(a)(17) of the Code shall be Two Hundred Thousand Dollars ($200,000) (as adjusted under the Code for cost of living increases) for Plan Years beginning before 2 January 1, 1994, and shall be One Hundred and Fifty Thousand Dollars ($150,000) (as so adjusted) for Plan Years beginning on or after January 1, 1994. 5. DIRECT ROLLOVERS ACCEPTED. Effective with respect to rollover contributions made on or after January 1, 1993, Section 3.6.2 of the Plan Statement shall be amended to read as follows: 3.6.2. Eligible Contributions. Each Participant may contribute to the Plan, within such time and in such form and manner as may be prescribed by the Committee in accordance with those provisions of federal law relating to rollover contributions, cash (or the cash proceeds from distributed property) received by the Participant in an eligible rollover distribution from a qualified plan or from an individual retirement account or annuity established solely to hold such eligible rollover distribution. Also, the Committee may establish rules and conditions regarding the acceptance of direct rollovers under Section 401(a)(31) of the Code from trustees or custodians of other qualified pension, profit sharing or stock bonus plans. 6. ACP TEST. Effective with respect to contributions made for Plan Years beginning on or after January 1, 1994, Section 3.7.2(b) of the Plan Statement shall be amended to read in full as follows: (b) Family Member. If a highly compensated eligible employee is subject to the family aggregation rules of section 414(q)(6) of the Code because such employee is either a five percent (5%) owner or one of the ten (10) most highly compensated employees (as defined in Appendix D), the combined contribution percentage for the family group (which is treated as one highly compensated eligible employee) shall be determined by combining the amounts described in Section 3.7.1(c)(i) and by combining the compensation described in section 3.7.1(d) of all family members who are eligible employees. The family members who are aggregated with respect to a highly compensated eligible employee shall be disregarded as separate eligible employees in determining the average contribution percentage of highly compensated eligible employees and the average contribution percentage of all other eligible employees. If an eligible employee is required to be aggregated as a member of more than one family group in the Plan, all eligible employees who are members of those family groups that include that eligible employee are aggregated as one family group. With respect to any highly compensated eligible employee, "family" shall mean the employee's spouse and lineal ascendants and descendants and the spouses of such lineal ascendants and descendants. The limit on annual compensation under section 401(a)(17) of the Code applies to the above contribution percentage determination except that for purposes of that limit, the term "family" shall include only the spouse of the eligible employee and lineal descendants of the eligible employee who have not attained age nineteen (19) years before the close of that Plan Year. For purposes of the 3 foregoing, the annual compensation limit under section 401(a)(17) of the Code shall be Two Hundred Thousand Dollars ($200,000) (as adjusted under the Code for cost of living increases) for Plan Years beginning before January 1, 1994, and shall be One Hundred and Fifty Thousand Dollars ($150,000) (as so adjusted) for Plan Years beginning on or after January 1, 1994. 7. ESTABLISHMENT OF SUBFUNDS. Effective January 1, 1994, Section 4.1 of the Plan Statement shall be amended by adding a new Section 4.1.4 which shall read in full as follows: 4.1.4. ERISA Section 404(c) Compliance. If the Committee and the Trustee agree, the Committee may establish investment subfunds and operational rules which are intended to satisfy section 404(c) of ERISA and the regulations thereunder. Such investment subfunds shall permit Participants and Beneficiaries the opportunity to choose from at least three investment alternatives, each of which is diversified, each of which present materially different risk and return characteristics, and which, in the aggregate, enable Participants and Beneficiaries to achieve a portfolio with appropriate risk and return characteristics consistent with minimizing risk through diversification. Such operational rules shall provide the following, and shall otherwise comply with section 404(c) of ERISA and the regulations and rules promulgated thereunder from time to time: (a) Participants and Beneficiaries may give investment instructions to the Trustee at least once every three months; (b) the Trustee must follow the investment instructions of Participants and Beneficiaries that comply with the Plan's operational rules, provided that the Trustee may in any event decline to follow any investment instructions that: (i) would result in a prohibited transaction described in section 406 of ERISA or section 4975 of the Code; (ii) would result in the acquisition of an asset that might generate income which is taxable to the Plan; (iii) would not be in accordance with the documents and instruments governing the Plan insofar as they are consistent with Title I of ERISA; 4 (iv) would cause a fiduciary to maintain indicia of ownership of any assets of the Plan outside of the jurisdiction of the district courts of the United States other than as permitted by section 404(b) of ERISA and Department of Labor regulation section 2050.404b-1; (v) would jeopardize the Plan's tax status under the Code; (vi) could result in a loss in excess of a Participant's or Beneficiary's Account balance; (c) Participants and Beneficiaries shall be periodically informed of actual expenses to their Accounts which are imposed by the Plan and which are related to their Plan investment decisions. (d) with respect to any subfund consisting of Employer securities and intended to satisfy the requirements of section 404(c) of ERISA, (i) Participants and Beneficiaries shall be entitled to all voting, tender and other rights appurtenant to the ownership of such securities, (ii) procedures shall be established to ensure the confidential exercise of such rights, except to the extent necessary to comply with federal and state laws not preempted by ERISA, and (iii) the Trustee shall ensure the sufficiency of and compliance with such confidentiality procedures. 8. DIRECT ROLLOVER RULES. Effective for distributions payable on or after January 1, 1993, Section 7.1 of the Plan Statement shall be amended by adding thereto new Sections 7.1.4 and 7.1.5 which shall read in full as follows: 7.1.4. Notices. The Committee will issue such notices as may be required under sections 402(f), 411(a)(11) and other sections of the Code in connection with distributions from the Plan. No distribution will be made unless it is consistent with such notice requirements. Distribution may commence less than thirty (30) days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations or the notice required under section 1.402(f)-2T of the Income Tax Regulations is given, provided that: (a) The Committee clearly informs the Distributee that the Distributee has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect distribution and, if applicable, a particular distribution option); and (b) The Distributee, after receiving the notice, affirmatively elects a distribution. 7.1.5. Direct Rollover. A Distributee who is eligible to elect a direct rollover may elect, at the time and in the manner prescribed by the Committee, to have all or any portion of an 5 eligible rollover distribution paid directly to an eligible retirement plan specified by the Distributee in a direct rollover. A Distributee who is eligible to elect a direct rollover includes only a Participant, a Beneficiary who is the surviving spouse of a Participant and a Participant's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Appendix C. (a) Eligible rollover distribution means any distribution of all or any portion of a Total Account to a Distributee who is eligible to elect a direct rollover except (i) any distribution that is one of a series of substantially equal installments payable not less frequently than annually over the life expectancy of such Distributee or the joint and last survivor life expectancy of such Distributee and such Distributee's designated Beneficiary, and (ii) any distribution that is one of a series of substantially equal installments payable not less frequently than annually over a specified period of ten (10) years or more, and (iii) any distribution to the extent such distribution is required under section 401(a)(9) of the Code, and (iv) the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) Eligible retirement plan means (i) an individual retirement account described in section 408(a) of the Code, or (ii) an individual retirement annuity described in section 408(b) of the Code, or (iii) an annuity plan described in section 403(a) of the Code, or (iv) a qualified trust described in section 401(a) of the Code that accepts the eligible rollover distribution. However, in the case of an eligible rollover distribution to a Beneficiary who is the surviving spouse of a Participant, an eligible retirement plan is only an individual retirement account or individual retirement annuity as described in section 408 of the Code. (c) Direct rollover means the payment of an eligible rollover distribution by the Plan to the eligible retirement plan specified by the Distributee who is eligible to elect a direct rollover. 9. REENROLLMENT. Effective October 1, 1992, the third sentence of Section 7.7.4 of the Plan Statement shall be amended to read in full as follows: Thereafter, the Participant may, upon giving written notice to the Committee, enter into a new Retirement Savings Agreement effective as of the payday on or after any subsequent Enrollment Date following such twelve (12) month period, provided the Participant is in Recognized Employment on that date. 6 10. ANCILLARY SERVICES. Effective for Plan Years beginning on or after October 1, 1992, Section 10.6(d) of the Plan Statement shall be amended to read in full as follows: (d) To hold uninvested reasonable amounts of cash whenever it is deemed advisable to do so, and to deposit the same, with or without interest, in the commercial or savings departments of any corporate Trustee serving hereunder or of any other bank, trust company or other financial institution including those affiliated in ownership with the Trustee named in the Plan Statement. 11. SECTION 415 APPENDIX. Effective for Plan Years beginning on or after October 1, 1992, the Appendix A to the Plan Statement shall be amended by substituting therefore the Appendix A attached to this Amendment. 12. TOP HEAVY APPENDIX. Effective for Plan Years beginning on or after October 1, 1992, the Appendix B to the Plan Statement shall be amended by substituting therefore the Appendix B attached to this Amendment. 13. QDRO APPENDIX. Effective for Plan Years beginning on or after January 1, 1993, the Appendix C to the Plan Statement shall be amended by substituting therefore the Appendix C attached to this Amendment. 14. HCE APPENDIX. Effective for Plan Years beginning on or after October 1, 1992, the Appendix D to the Plan Statement shall be amended by substituting therefore the Appendix D attached to this Amendment. 15. SAVINGS CLAUSE. Save and except as herein expressly amended, the Plan Statement shall continue in full force and effect. IN WITNESS WHEREOF, Each of the parties hereto has caused these presents to be executed, all as of the day and year first above written. FIRST TRUST NATIONAL GREEN TREE FINANCIAL ASSOCIATION CORPORATION By //s// Harold Orcutt By //s// Barbara J. Didrikson ------------------- ----------------------------- Its Vice President Its Vice President -------------- ---------------------- And //s//Debra Rosenberg And -------------------- ------------------------- Its Vice President Its -------------- ---------------------- 7 SECOND AMENDMENT OF GREEN TREE FINANCIAL CORPORATION 401(k) PLAN TRUST AGREEMENT THIS AGREEMENT, Made and entered into as of August 22, 1996, by and between GREEN TREE FINANCIAL CORPORATION, a Minnesota corporation (the "Principal Sponsor"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking association organized under the laws of the United States, as trustee (together with its successors, the "Trustee"); WITNESSETH: That WHEREAS, The Principal Sponsor has heretofore established and maintained a profit sharing plan (the "Plan") which, in most recent amended and restated form, is embodied in a document dated October 1, 1992 and entitled "Green Tree Financial Corporation 401(k) Plan Trust Agreement" (the "Plan Statement"), as amended by a First Amendment dated November 23, 1994; and WHEREAS, The Principal Sponsor has reserved to itself the power to make amendments of the Plan Statement; and NOW, THEREFORE, The Plan Statement is hereby further amended as follows: 1. ELIGIBILITY. Effective for each employee whose first Hour of Service for Green Tree Financial Corporation occurs on or after January 2, 1996, Section 2.1 of the Plan Statement shall be amended to read in full as follows: 2.1. General Eligibility Rule. 2.1.1. General Rule. Each employee who: (a) has attained age twenty-one (21) years, (b) is initially hired into Recognized Employment, and (c) is then scheduled to have at least one thousand (1,000) Hours of Service in the first twelve (12) months of employment, shall become a Participant on the first Enrollment Date that is coincident with or next following the date that is six (6) months after the employee's first day of Recognized Employment. However, if the employee is not scheduled to have at least one thousand (1,000) Hours of Service in the first twelve (12) months of employment on the date that is six (6) months after the employee's first day of Recognized Employment, this paragraph shall not apply to that employee. 2.1.2. ERISA Fail-Safe Rule. Notwithstanding the foregoing, an employee shall become a Participant on the Enrollment Date coincident with or next following the date as of which the employee has attained age twenty-one (21) years and completed one (1) year of Eligibility Service, if the employee is then employed in Recognized Employment. If the employee is not then employed in Recognized Employment, the employee shall become a Participant on the first date thereafter upon which such employee enters Recognized Employment. DEFERRAL LIMITATION. Effective for Retirement Savings elections made on or after October 1, 1996, Section 2.4 of the Plan Statement shall be amended to read in full as follows: 2.4. Retirement Savings Agreement. Subject to the following rules, the Retirement Savings Agreement which each Participant may execute shall provide for elective contributions through a reduction equal to not less than one percent (1%) nor more than fifteen percent (15%) of the amount of Recognized Compensation which otherwise would be paid to the Participant by the Employer each payday. Such elective contributions, however, shall not exceed Seven Thousand Dollars ($7,000) under the Plan and any other plan of the Employer and Affiliates for that Participant's taxable year. Such Seven Thousand Dollar ($7,000) limit shall be adjusted for cost of living at the same time and in the same manner as under section 415(d) of the Code. The Committee may, from time to time under rules, change the minimum and maximum allowable elective contributions. The reductions in earnings for elective contributions agreed to by the Participant shall be made by the Employer from the Participant's remuneration each payday on and after the Enrollment Date for so long as the Retirement Savings Agreement remains in effect. 2. SAVINGS CLAUSE. Save and except as herein expressly amended, the Plan Statement shall continue in full force and effect. IN WITNESS WHEREOF, Each of the parties hereto has caused these presents to be executed, all as of the day and year first above written. FIRST TRUST NATIONAL GREEN TREE FINANCIAL ASSOCIATION CORPORATION By //s// Harold Orcutt By //s// Barbara Didrikson ------------------------------ ------------------------------ Its Vice President Its Vice President --------------------------- --------------------------- And //s// Scott C. Curtiss And //s// Richard G. Evans ----------------------------- ----------------------------- Its Vice President Its Executive Vice President ---------------------------- --------------------------- 2 THIRD AMENDMENT OF GREEN TREE FINANCIAL CORPORATION 401(k) PLAN TRUST AGREEMENT THIS AGREEMENT, Made and entered into as of December 30, 1996, by and between GREEN TREE FINANCIAL CORPORATION, a Minnesota corporation (the "Principal Sponsor"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking association organized under the laws of the United States, as trustee (together with its successors, the "Trustee"); WITNESSETH: That WHEREAS, The Principal Sponsor has heretofore established and maintained a profit sharing plan (the "Plan") which, in most recent amended and restated form, is embodied in a document dated October 1, 1992 and entitled "Green Tree Financial Corporation 401(k) Plan Trust Agreement" (the "Plan Statement"), as amended by a First Amendment dated November 23, 1994 and by a Second Amendment dated September 17, 1996; and WHEREAS, The Principal Sponsor has reserved to itself the power to make further amendments of the Plan Statement; and NOW, THEREFORE, The Plan Statement is hereby further amended as follows: 1. SPECIAL RULES FOR EMPLOYEES TRANSFERRED FROM FINOVA. Effective as of October 19, 1996, Section 1 of the Plan Statement shall be amended by adding a new Section 1.4 to read in full as follows: 1.4. Special Rules for Employees Transferred From FINOVA. Any employee who: (a) is a "Transferred Employee" as defined in Section 5.6(a) of the Stock Purchase Agreement dated as of October 19, 1996, between the Principal Sponsor and FINOVA Capital Corporation, (b) enters Recognized Employment, and (c) was immediately before such entry a participant in a plan sponsored by FINOVA Capital Corporation that is qualified under Code section 401(a) and 401(k), shall become a Participant upon the date of such entry (and such date shall, with respect to such employee, be considered an Enrollment Date under Section 1.1.11). For any Transferred Employee described in Section 1.4(a) above, all prior service with FINOVA Capital Corporation (or any member of its "controlled group" under Code sections 414(b) or (c)) shall be considered service with an Affiliate for all purposes of this Plan. 2. SAVINGS CLAUSE. Save and except as herein expressly amended, the Plan Statement shall continue in full force and effect. IN WITNESS WHEREOF, Each of the parties hereto has caused these presents to be executed, all as of the day and year first above written. FIRST TRUST NATIONAL ASSOCIATION GREEN TREE FINANCIAL CORPORATION By //s// Scott C. Curtiss By //s// Richard G. Evans ---------------------- ---------------------- Its Vice President Its Executive Vice President -------------- ------------------------ And //s//Deb Marchoff And //s// Barbara Didrikson ----------------- ----------------------- Its Senior Vice President Its Vice President --------------------- -------------- 2 EX-10.(P) 3 1996 RESTATED SUPPL. PENSION PLAN Exhibit 10(p) ------------- GREEN TREE FINANCIAL CORPORATION 1996 RESTATED SUPPLEMENTAL PENSION PLAN WHEREAS, This corporation has heretofore adopted a tax-qualified defined benefit pension plan called the "GREEN TREE ACCEPTANCE, INC. PENSION PLAN" (the "Pension Plan") for the purpose of providing retirement benefits to its employees and employees of certain affiliated corporations; and WHEREAS, The Pension Plan is subject to the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") and is intended to qualify under section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, By operation of section 401(a) of the Code, benefits under the Pension Plan are restricted so that they do not exceed maximum benefits allowed under section 415 of the Code; and WHEREAS, ERISA authorizes the establishment of an unfunded, nonqualified plan of deferred compensation maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations on benefits imposed by section 415 of the Code; and WHEREAS, This corporation therefore adopted the GREEN TREE ACCEPTANCE, INC. SUPPLEMENTAL PENSION PLAN (the "Supplemental Plan") to pay such excess benefits; and WHEREAS, For benefits accruing under the Pension Plan during plan years beginning after December 31, 1988, the maximum amount of annual compensation which may be taken into account for any employee may not exceed a fixed dollar amount (initially $200,000) which is established under section 401(a)(17) of the Code; and WHEREAS, By reason of any compensation which was voluntarily deferred pursuant to a prior irrevocable agreement under a nonqualified deferred compensation plan maintained by the corporation, the benefits under the Pension Plan may be less than if such compensation had not been deferred; and WHEREAS, ERISA authorizes the establishment of an unfunded, nonqualified plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees; and WHEREAS, The Supplemental Plan was amended to provide benefits on compensation above the compensation limitation imposed by section 401(a)(17) of the Code and on compensation which is voluntarily deferred pursuant to a prior irrevocable agreement under a nonqualified deferred compensation plan maintained by the corporation; -74- WHEREAS, The State Taxation of Pension Income Act of 1995 (the "Act") prohibits states from taxing certain retirement income of an individual who is not a resident or domiciliary of the state even if the retirement income was earned while the individual worked in such state; and WHEREAS, The Act provides that such a state may not impose a tax on a payment made from a plan maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed under certain sections of the Code, including sections 415 and 401(a)(17). WHEREAS, The Act does not protect payments made from a nonqualified deferred compensation plan relating to compensation which is voluntarily deferred; WHEREAS, The corporation has not established a nonqualified deferred compensation plan under which a participant can voluntarily defer compensation pursuant to a prior irrevocable agreement; WHEREAS, This corporation desires to make clear that, for purposes of state taxation, all payments under the Supplemental Plan are solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed under sections 415 and 401(a)(17) of the Code by removing all references to a nonqualified deferred compensation plan; and WHEREAS, This corporation changed its name from Green Tree Acceptance, Inc. to Green Tree Financial Corporation, effective May 27, 1992; NOW, THEREFORE, This corporation does hereby amend and restate the Supplemental Plan to read in full as follows: 1. Plan Name. This plan shall be referred to as the GREEN TREE FINANCIAL CORPORATION 1996 RESTATED SUPPLEMENTAL PENSION PLAN (formerly known as the GREEN TREE ACCEPTANCE, INC. 1987 RESTATED SUPPLEMENTAL PENSION PLAN) (hereinafter the "Plan"). 2. Participants. The individuals eligible to participate in and receive benefits under the Plan are those management or highly compensated employees of Green Tree Financial Corporation and its affiliates who are (i) participants in the GREEN TREE FINANCIAL CORPORATION PENSION PLAN and (ii) actively employed by Green Tree Financial Corporation and (iii) highly compensated employees as defined in section 414(q) of the Internal Revenue Code at the time of their retirement from Green Tree Financial Corporation and its affiliates and (iv) affirmatively selected for participation in this Plan by the Board of Directors of Green Tree Financial Corporation. 2 3. Benefit for Participants. This Plan shall pay to participating employees the excess, if any, of (i) the amount that would have been payable under the Pension Plan if such benefit had been determined without regard to the benefit limitations under section 415 of the Code and without regard to compensation limitation of section 401(a)(17) of the Code, over (ii) the amount actually paid from the Pension Plan after taking into account the benefit limitations under section 415 of the Code and the compensation limitation of section 401(a)(17) of the Code. Except as provided in paragraph 5 below, this benefit (minus any withholding and payroll taxes which must be deducted therefrom) shall be paid to the participating employee directly from the general assets of Green Tree Financial Corporation. Unless the Participant elects otherwise in a writing filed with the Pension Committee within thirty (30) days following the later of (a) the date of adoption of this restated Plan document, or (b) the date the Participant is informed that he has been selected for participation in this Plan under Section 2(iv) hereof, such benefit shall be paid in a single lump sum determined by the actuary of the Pension Plan under the actuarial factors then in effect for the Pension Plan. If the Participant so elects not to receive a lump sum, then the benefit hereunder will be paid in the same manner, at the same time, for the same duration and in the same form as if such benefit had been paid directly under the Pension Plan; provided, however, that, if the Participant elects a lump sum from the Pension Plan, then the benefit hereunder shall be paid as if the Participant had made no election under the Pension Plan (that is, as if the Participant received the presumptive form of benefit under the Pension Plan). All elections and optional forms of settlement in effect and all other rules governing the payment of benefits under the Pension Plan shall, to the extent practicable, be given effect under this Plan so that the participating employee will receive from a combination of the Pension Plan and this Plan the same benefit (minus any withholding and payroll taxes which must be deducted therefrom) which would have been received under the Pension Plan if the limitation on benefits under section 415 of the Code and the compensation limitation of section 401(a)(17) of the Code had not been in effect. 4. Benefit to Beneficiaries. Unless the Participant has received a lump sum under Section 3 hereof, there shall be paid under this Plan and to the surviving spouse or other joint or contingent annuitant or beneficiary the excess, if any, of 3 (i) the amount which would have been payable under the Pension Plan if such benefit had been determined without regard to the benefit limitations of section 415 of the Code and without regard to compensation limitation of section 401(a)(17) of the Code, over (ii) the amount actually paid from the Pension Plan after taking into account the benefit limitations under section 415 of the Code and the compensation limitation of section 401(a)(17) of the Code. Except as provided in paragraph 5 below, this benefit (minus any withholding and payroll taxes which must be deducted therefrom) shall be paid to such person directly from the general assets of Green Tree Financial Corporation in the same manner, at the same time, for the same duration and in the same form as if such benefit had been paid directly from the Pension Plan. Any elections and optional forms of settlement in effect and all other rules governing the payment of benefits under the Pension Plan shall, to the extent practicable, be given effect under this Plan so that such person will receive from a combination of the Pension Plan and this Plan the same benefit (minus any withholding and payroll taxes which must be deducted therefrom) which would have been received under the Pension Plan if the limitation on benefits under section 415 of the Code and the compensation limitation of section 401(a)(17) of the Code had not been in effect. 5. Commutation of Excess Benefits. Notwithstanding anything apparently to the contrary in paragraphs 3 or 4 above, at the election of the Pension Committee of Green Tree Financial Corporation, and for the sole purpose of minimizing employer payroll or other taxes due on benefits payable under this Plan, such Pension Committee may (without the consent of the Participant, joint or contingent annuitant or beneficiary) commute the value of benefits payable with respect to the Participant at the time of the retirement, quit, discharge, death or other termination of employment to an actuarially equivalent benefit payable in fifteen (15) or fewer annual installments (with no life contingencies). Such conversion shall be made by the actuary of the Pension Plan under actuarial factors then in effect for the Pension Plan. Any commuted amount remaining unpaid at the death of the recipient shall be paid to the estate of the recipient. If the Pension Committee elects to commute the benefits payable to or with respect to the Participant, the Pension Committee shall cause the Participant or the person to whom such benefits are payable to be immediately notified in writing of that commutation. 6. Funding. All benefits payable under this Plan shall be paid exclusively from the general assets of Green Tree Financial Corporation and no fund or trust shall be established apart from 4 the general assets of such corporation for this purpose nor shall any assets or property be segregated or set apart from such corporation's general assets for the purposes of funding this Plan. 7. Amendment and General Matters. The Board of Directors of Green Tree Financial Corporation may amend this Plan prospectively, retroactively, or both, at any time and for any reason deemed sufficient by it; provided, however, that such amendment cannot reduce the then accrued benefit of any person without such person's written consent. Green Tree Financial Corporation shall be the Plan Administrator of this Plan. This Plan shall not alter, enlarge or diminish any person's employment rights or rights or obligations under the Pension Plan. 8. Claims Procedure. An application for benefits under Sections 3 or 4 shall be considered as a claim for the purposes of this section. 8.1. Original Claim. Any employee, former employee, joint annuitant or beneficiary of the Participant may, if he so desires, file with the Pension Committee of Green Tree Financial Corporation a written claim for benefits under the Plan. Within ninety (90) days after the filing of such a claim, the Pension Committee shall notify the claimant in writing whether his claim is upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred eighty days from the date the claim was filed) to reach a decision on the claim. If the claim is denied in whole or in part, the Pension Committee shall state in writing: (a) the specific reasons for the denial; (b) the specific references to the pertinent provisions of this Plan statement on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the claims review procedure set forth in this section. 8.2 Claims Review Procedure. Within sixty (60) days after receipt of notice that his claim has been denied in whole or in part, the claimant may file with the Pension Committee a written request for a review and may, in conjunction therewith, submit written issues and comments. 5 Within sixty (60) days after the filing of such a request for review, the Pension Committee shall notify the claimant in writing whether, upon review, the claim was upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred twenty days from the date the request for review was filed) to reach a decision on the request for review. 8.3. General Rules. (a) No inquiry or question shall be deemed to be a claim or a request for a review of a denied claim unless made in accordance with the claims procedure. The Pension Committee may require that any claim for benefits and any request for a review of a denied claim be filed on forms to be furnished by the Pension Committee upon request. (b) All decision on claims and on requests for a review of denied claims shall be made by the Pension Committee. (c) The Pension Committee may, in its discretion, hold one or more hearings on a claim or a request for a review of a denied claim. (d) Claimants may be represented by a lawyer or other representative (at their own expense), but the Pension Committee reserves the right to require the claimant to furnish written authorization. A claimant's representative shall be entitled to receive copies of notices sent to the claimant. (e) The decision of the Pension Committee on a claim and on a request for a review of a denied claim shall be served on the claimant in writing. If a decision or notice is not received by a claimant within the time specified, the claim or request for a review of a denied claim shall be deemed to have been denied. (f) Prior to filing a claim or a request for a review of a denied claim, the claimant or his representative shall have a reasonable opportunity to review a copy of this Plan statement and all other pertinent documents in 6 the possession of Green Tree Financial Corporation and the Pension Committee. 9. Construction. This Plan is adopted with the understanding that it is an unfunded excess benefit plan within the meaning of section 3(36) of ERISA. Each provision hereof shall be interpreted and administered accordingly. This Plan is adopted in the State of Minnesota and shall be construed and enforced according to the laws of that State to the extent such laws are not preempted by federal law. IN WITNESS WHEREOF, This Restated Supplemental Pension Plan has been executed by proper officers of Green Tree Financial Corporation pursuant to authority of its Board of Directors granted on May 15, 1996. GREEN TREE FINANCIAL CORPORATION By //s// Robert D. Potts ------------------------------ Robert D. Potts Its President and Chief Operating Officer And //s// Joel H. Gottesman ----------------------------- Joel H. Gottesman Its Senior Vice President, General Counsel and Secretary 7 EX-11.(A) 4 COMP. OF PRIMARY EARNINGS PER SHARE Exhibit 11.(a) -------------- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- COMPUTATION OF PRIMARY EARNINGS PER SHARE -----------------------------------------
Year ended December 31 ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net Earnings $308,736,000 $253,969,000 $181,279,000 ============ ============ ============ Weighted average number of common and common equivalent shares outstanding: Weighted average common shares outstanding 136,995,701 136,644,397 134,941,996 Dilutive effect of stock options after application of treasury-stock method 3,566,129 3,445,259 3,726,342 ------------ ------------ ------------ 140,561,830 140,089,656 138,668,338 ------------ ------------ ------------ Earnings per share: Net earnings $2.20 $1.81 $1.31 ===== ===== =====
-81- EX-11.(B) 5 COMP. OF FULLY DILUTED EARNINGS PER SHARE Exhibit 11.(b) -------------- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE -----------------------------------------------
Year ended December 31 ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net earnings $308,736,000 $253,969,000 $181,279,000 ============ ============ ============ Weighted average number of common and common equivalent shares outstanding: Weighted average common shares outstanding 136,995,701 136,644,397 134,941,996 Dilutive effect of stock options after application of treasury-stock method assuming full dilution 3,726,183 3,465,972 3,905,550 ------------ ------------ ------------ 140,721,884 140,110,369 138,847,546 ------------ ------------ ------------ Earnings per share: $2.19 $1.81 $1.31 ===== ===== =====
-82- EX-12 6 COMP. OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12. ----------- GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES -------------------------------------------------
Year ended December 31 -------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Earnings: Earnings before income taxes $497,961,000 $409,628,000 $302,131,000 $200,537,000 $118,806,000 Fixed charges: Interest 70,050,000 57,313,000 41,619,000 51,155,000 44,868,000 One-third rent 2,888,000 2,034,000 1,688,000 1,483,000 1,652,000 ------------ ------------ ------------ ------------ ------------ 72,938,000 59,347,000 43,307,000 52,638,000 46,520,000 ------------ ------------ ------------ ------------ ------------ $570,899,000 $468,975,000 $345,438,000 $253,175,000 $165,326,000 ============ ============ ============ ============ ============ Fixed charges: Interest $ 70,050,000 $ 57,313,000 $ 41,619,000 $ 51,155,000 $ 44,868,000 One-third rent 2,888,000 2,034,000 1,688,000 1,483,000 1,652,000 ------------ ------------ ------------ ------------ ------------ $ 72,938,000 $ 59,347,000 $ 43,307,000 $ 52,638,000 $ 46,520,000 ============ ============ ============ ============ ============ Ratio of earnings to fixed charges (1) 7.83 7.90 7.98 4.81 3.55 ==== ==== ==== ==== ====
(1) For purposes of computing the ratio, earnings consist of earnings before income taxes plus fixed charges. -83- EX-21 7 SUBSIDIARIES OF REGISTRANT Exhibit 21. ----------- GREEN TREE FINANCIAL CORPORATION SUBSIDIARIES The following is a list of the Company's subsidiaries which are all owned 100% by Green Tree Financial Corporation who is the ultimate or immediate parent: State of Name of Subsidiary Incorporation - ------------------ ------------- Green Tree Financial Servicing Corporation Delaware Green Tree Financial Corp.- Alabama Delaware Green Tree Financial Corp.- Texas Delaware Green Tree Credit Corp. New York Green Tree Consumer Discount Company Pennsylvania Consolidated Acceptance Corporation Nevada Piper Financial Services, Inc. Minnesota Green Tree Retail Services Bank South Dakota Green Tree Capital Finance Utah Green Tree Vendor Services Corporation Delaware Green Tree Finance Corp.-One Minnesota Green Tree Finance Corp.-Two Minnesota Green Tree Finance Corp.-Three Minnesota Green Tree Finance Corp.-Five Minnesota Green Tree Manufactured Housing Net Interest Margin Finance Corp. I Delaware Green Tree Manufactured Housing Net Interest Margin Finance Corp. II Delaware Green Tree Floorplan Funding Corp. Delaware Green Tree Vehicles Guaranty Corporation Minnesota MaHCS Guaranty Corporation Delaware -84- State of Name of Subsidiary Incorporation - ------------------ ------------- Green Tree RECS Guaranty Corporation Minnesota Green Tree First GP Inc. Minnesota Green Tree Second GP Inc. Minnesota Green Tree Agency, Inc. Minnesota Green Tree Agency of Alabama, Inc. Alabama Green Tree Agency of Kentucky, Inc. Kentucky Green Tree Agency of Nevada, Inc. Nevada GTA Agency, Inc. New York Crum-Reed General Agency, Inc. Texas Dealer Service Trust Corporation Minnesota Consolidated Casualty Insurance Company Arizona G.T. Reinsurance Limited Turks and Caicos Island Rice Park Properties Corporation Minnesota Woodgate Consolidated Incorporated Texas Woodgate Utilities Incorporated Texas -85- EX-23 8 CONSENT OF INDEPENDENT CPA Exhibit 23. ----------- CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------- The Board of Directors Green Tree Financial Corporation: We consent to incorporation by reference of our report dated January 24, 1997, relating to the consolidated balance sheets of Green Tree Financial Corporation and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 Form 10-K of Green Tree Financial Corporation, in the following Registration Statements of Green Tree Financial Corporation; No. 2- 88293 on Form S-8, No. 33-26498 on Form S-8/S-3, No. 33-60541 on Form S-8/S-3, No. 33-51804 on Form S-3, No. 33-64185 on Form S-3, No. 33-64183 on Form S-3, No. 333-18343 on Form S-3, No. 333-20335 on Form S-3, No. 333-15437 on Form S-3 and No. 333-21191 on Form S-8/S-3. Minneapolis, Minnesota March 11, 1997 -86- EX-24 9 POWERS OF ATTORNEY Exhibit 24. ----------- POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Lawrence M. Coss and Joel H. Gottesman, and each or either one of them, his true and lawful attorney(s)-in-fact and agent(s), with full power of substitution and resubstitution for him and in his name, place, and stead, in any and all capacities, to sign the 1996 Annual Report on Form 10-K of Green Tree Financial Corporation, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney(s)-in-fact and agent(s), and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney(s)-in-fact and agent(s), or either of them, or his or their substitutes, may lawfully do or cause to be done by virtue hereof. Signature Date --------- ---- /s/ W. Max McGee March 14, 1997 ------------------------- W. Max McGee /s/ Robert S. Nickoloff March 14, 1997 ------------------------- Robert S. Nickoloff -87- EX-27 10 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements of Green Tree Financial Corporation and Subsidiaries for the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 DEC-31-1996 613,555,000 11,925,000 923,893,000 14,260,000 453,008,000 0 121,837,000 43,978,000 3,791,920,000 0 290,348,000 1,398,000 0 0 1,244,056,000 3,791,920,000 941,486,000 924,111,000 0 356,100,000 0 (351,743,000) 70,050,000 497,961,000 189,225,000 308,736,000 0 0 0 308,736,000 2.20 2.19
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